OBLIGATIONS AND CONTRACTS Expanded Course Outline Professor E. A.

Labitag Karichi Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 2 of 110 Table of Contents Title I. OBLIGATIONS............................................................ ................................................................................ .......... 3 Chapter I. General Provision....................................... ................................................................................ .................. Concept of Obligation ....................................... ................................................................................ ....................... Sources of Obligations ................................. ................................................................................ ............................ Classifications of Obligations..................... ................................................................................ ................................ 3 3 4 9 Chapter II. Nature and Effects of Obligations .................................. ............................................................................... 10 Kinds of Prestation ......................................................... ................................................................................ ........ 10 Breach of Obligation................................................ ................................................................................ ............... 13 Remedies of Creditor In Case of Breach ...................... ................................................................................ .............. 17 Subsidiary Remedies of Creditor............................... ................................................................................ ................ 19 Extinguishment of Liability In Case of Breach Due To Fortuit ous Event ...................................................................... .... 21 Usurious Transactions .................................................. ................................................................................ .......... 22 Fulfillment of Obligations ....................................... ................................................................................ ................. 26 Transmissibility of Rights ................................ ................................................................................ ........................ 26 Chapter III. Different Kinds of Civil Obligations .. ................................................................................ ............................ 26 Pure and Conditional ........................... ................................................................................ ................................... 26 Obligations with a Period ............... ................................................................................ ......................................... 33 Alternative Obligations............ ................................................................................ ................................................ 10 Joint and Solidary Obligatio ns ............................................................................. ..................................................... 38 Divisible and Indivisib le Obligations ................................................................. ......................................................... 44 Obligations with a Penal Clause ................................................................... ............................................................ 46 Chapter IV. Exti nguishment of Obligations....................................................... .............................................................. 49 Modes of Extin guishment ...................................................................... .................................................................. 49 Payment or Performance ................................................................... ..................................................................... 49 Loss or Impossibility.................................................................. ............................................................................. 54 Confusion or Merger of Rights ................................................. ................................................................................

63 Compensation ............................................................... ................................................................................ ........ 10 Novation ........................................................... ................................................................................ ................... 10 Title II. CONTRACTS ..................................... ................................................................................ ................................. 72 Chapter I. General Provisions ............. ................................................................................ ......................................... 72 Chapter II. Essential Requisites of Contracts ..................................................................... ............................................. 76 Consent ....................... ................................................................................ ........................................................ 76 Object of Contracts ................................................................................ ................................................................ 83 Cause of Con tracts.......................................................................... ....................................................................... 84 Chapt er III. Form of Contracts....................................................... .............................................................................. 8 6 Chapter IV. Reformation of Instruments........................................ ................................................................................ 87 Chapter V. Interpretation of Contracts ..................................... ................................................................................ ..... 88 Chapter VI. Rescissible Contracts ..................................... ................................................................................ ............ 90 Chapter VII. Voidable or Annullable Contracts .................. ................................................................................ .............. 93 Chapter VIII. Unenforceable Contracts......................... ................................................................................ ................. 95 Chapter IX. Void or Inexistent Contracts .................. ................................................................................ ..................... 97 Title III. NATURAL OBLIGATIONS ........................ ................................................................................ .......................... 103 Title IV. ESTOPPEL .............................. ................................................................................ ........................................ 105 Title V. TRUSTS ................... ................................................................................ ....................................................... 108 Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 3 of 110 University of the Philippines College of Law OBLIGATIONS AND CONTRACTS Professor Eduardo A. Labitag 2nd Semester, AY 2008-2009 Title I. OBLIGATIONS Chapter I. General Provision CONCEPT OF OBLIGATION Definition Art 1156 Obligation is a juridical necessity to give, to do or not to do. OBLIGATORY RELATION IN ITS TOTALITY: The juridical relation, created by vir tue of certain facts, between two or more persons, whereby the creditor or oblig ee, may demand of the debtor or obligor, a definite prestation. on PASSIVE SIDE: Where there is a right or power to demand, there is a correlative obligation or an imposition upon a person of a definite conduct. Criticism of definition: It is one sided, reflects only the debtor s side of the agreement Elements of Oblig ation 1. Active subject power to demand the prestation (obligee/creditor) Person al 2. Passive subject bound to perform the prestation (obligor/debtor) elements Temporary indefiniteness of a subject e.g. negotiable instrument payable to bear er or a promise of a prize or a reward for anyone performing a certain act 3. Pr estation or Object not a thing but a particular conduct of the debtor, but alway s a prestation Sanchez Roman KINDS OF PRESTATION a. TO GIVE consists in the delivery of a movable or an immov able thing, in order to create a real right or for the use of the recipient or f or its simple possession or in order to return to its owner b. TO DO all kinds o f work or services, whether mental or physical c. NOT TO DO consists in abstaini ng from some act, includes not to give, both being negative obligations REQUISIT ES OF PRESTATION a. Physically and juridically possible b. Determinate or at lea st determinable according to pre-established elements or criteria c. Possible eq uivalent in money Pecuniary interest need not be for one of the parties, it mayb e for the benefit of 3rd person/s distinct from the parties to the contract Pres tation need not be of economic character to have pecuniary value, if it does not have value the law attributes to it economic value e.g. moral and nominal damag es 4. Efficient cause or juridical tie or vinculum juris relation between obligo r and oblige which is established: By law (e.g. relation of husband and wife giv ing rise to the obligation to support) By bilateral acts (e.g. contracts giving rise to the obligations stipulated therein) By unilateral acts (e.g. crimes and quasi-delicts) cannot be considered essential 5. Form in which the obligation is manifested Distinction between Natural and Civil Obligation NATURAL CIVIL Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] As to enf orceability As to basis Not by court actions, but by good conscience of debtor E quity and natural justice Court action or the coercive power of public authority Positive law Page 4 of 110 SOURCES OF OBLIGATIONS A. LAW [Ex-Lege] Art 1158 Obligations derived from law are NOT PRESUMED. Only th ose expressly determined in this Code or in special laws are demandable, and sha ll be regulated by the precepts of the law which establishes them; and as to wha t has not been foreseen, by the provisions of this book. - Governed by the law i tself - Agreement of the parties is not necessary e.g. tax collection, Art 448 a nd Art 488 - Not presumed, only those expressly provided are enforceable B. CONT RACTS [Ex-Contractu, Culpa Contractual] Art 1159 Obligations arising from contra cts have the force of law between the contracting parties and should be complied with in good faith. - Expresses principle of autonomy of will, presupposes that contract is valid and enforceable - PRE-CONTRACTUAL OBLIGATION: Damages can be recovered when contract is not perfected if: o Offers is clear and definite , le ading offeree in good faith to incur expenses in expectation of entering into a contract o Withdrawal of the offer must be without any illegitimate cause. If of feror: Guilty of fault or negligence, liability would be based on Art 2176 No fa ult or negligence, withdrawal was in abuse of right, liability would be based on Art 19 e.g. breach of promise to marry Art 1305 A contract is a meeting of mind s between two persons whereby one binds himself, with respect to the other, to g ive something or to render some service. C. QUASI-CONTRACTS or DELICTS [Quasi Ex -Contractu] Art 1160 Obligations derived from quasi-contracts shall be subject t o the provisions of Chapter 1, Title XVII. Art 2142 Certain lawful, voluntary an d unilateral acts give rise to the juridical relation of quasi-contract to the e nd that no one shall be unjustly enriched or benefited at the expense of another . Juridical relation which arises from certain acts that are: LAWFUL (against cr ime), VOLUNTARY (against quasi-delict based on negligence or mere lack of foresi ght) UNILATERAL (against contract in which there are two parties) E.g. Art 2144 Art 2150 Art 2154 Art 2164 Art 2167 Art 2168 Art 2174 Art 2175 Kinds of Quasi-contracts 1. Negotiorum gestio (officious management) Art 2144 Wh oever voluntarily takes charge of the agency or management of the business or pr operty of another, without any power from the latter, is obliged to continue the same until the termination of the affair and its incidents, or to require the p erson concerned to substitute him, if the owner is in a position to do so. This juridical relation DOES NOT arise in either of these instances: 1) When the prop erty or business is not neglected or abandoned 2) If in fact the manager has bee n tacitly authorized by the owner 2. Solutio indebiti (payment not due) Art 2154 If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 5 of 110 3. Other quasi-contracts (support given by strangers and other Good Samaritans ) Art 2164 Art 2165 Art 2166 When, without the knowledge of the person obliged to give support, it is given b y a stranger, the latter shall have a right to claim the same from the former, U NLESS it appears that he gave it out of piety and without intention of being rep aid. When funeral expenses are borne by a third person, without the knowledge of those relatives who were obliged to give support to the deceased, said relative s shall reimburse the third person, should the latter claim reimbursement. When the person obliged to support an orphan, or an insane or other indigent person u njustly refuses to give support to the latter, any third person may furnish supp ort to the needy individual, with right of reimbursement from the person obliged to give support. The provisions of this article apply when the father or mother of a child under eighteen years of age unjustly refuses to support him. When th rough an accident or other cause a person is injured or becomes seriously ill, a nd he is treated or helped while he is not in a condition to give consent to a c ontract, he shall be liable to pay for the services of the physician or other pe rson aiding him, UNLESS the service has been rendered out of pure generosity. Wh en during a fire, flood, storm, or other calamity, property is saved from destru ction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation. When the government, upon the failure of an y person to comply with health or safety regulations concerning property, undert akes to do the necessary work, even over his objection, he shall be liable to pa y the expenses. When by accident or other fortuitous event, movables separately pertaining to two or more persons are commingled or confused, the rules on co-ow nership shall be applicable. The rights and obligations of the finder of lost pe rsonal property shall be governed by Articles 719 and 720. The right of every po ssessor in good faith to reimbursement for necessary and useful expenses is gove rned by Article 546. When a third person, without the knowledge of the debtor, p ays the debt, the rights of the former are governed by Articles 1236 (recover wh at has been beneficial to debtor) and 1237 (cannot compel creditor to subrogate payor in his rights). When in a small community a nationality of the inhabitants of age decide upon a measure for protection against lawlessness, fire, flood, s torm or other calamity, any one who objects to the plan and refuses to contribut e to the expenses but is benefited by the project as executed shall be liable to pay his share of said expenses. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement from the latter. Art 2167 Art 2168 Art 2169 Art 2170 Art 2171 Art 2172 Art 2173 Art 2174 Art 2175 D. ACTS or OMISSIONS PUNISHED BY LAW [Ex-Delictu, Ex-Maleficio, Culpa Criminal] Art 1161 Civil obligations arising from criminal offense shall be governed by th e penal laws, subject to the provisions of Art 2177, and of the pertinent provis ions of Chapter 2, Preliminary Title on Human Relations and of Title XVIII of th is Book, regulating damages. Art 100, RPC Every person criminally liable for a f elony is also civilly liable. GENERAL RULE: Civil liability is a necessary conse quence of civil liability o Reason: Commission of crime causes not only moral ev il but also material damage. o Art 12, RPC Exempting circumstances; do not incur liability but are NOT EXEMPT from civil liability 1. Imbecile or insane person, unless acting in a lucid interval 2. Person under 9 years of age 3. Person over 9 years of age and under 15, unless acting with discernment 4. Acting under com pulsion of an irresistible force 5. Acting under impulse of an uncontrollable fe ar of an equal or greater injury EXCEPTION (crimes without civil liability) o Cr

iminal contempt o Gambling o Traffic violations Subsidiary Liability for Crime 1 . Innkeepers, tavern keepers and any other persons or corporations shall be civi lly liable for crimes committed in their establishment, in all cases where a vio lation of municipal ordinances or some general or special police regulation shal l have been committed by them or their employees. 2. Also applicable to employer s, teachers, persons and corporations engaged in any kind of industry for feloni es committed by their servants, pupils, apprentices or employees in discharge of their duties. - To hold employers subsidiarily liable for CRIME of an employee: committed in the performance of the functions or duties of the employee. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 6 of 110 But if action is based on CONTRACT, and not upon previous conviction of employee for a crime: employer s liability is PRIMARY and INDEPENDENT, not merely subsid iary. Civil liability arising from Crime Art 1161 Civil obligations arising from crimi nal offenses shall be governed by the penal laws, subject to the provisions of A rticle 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. Rules on Criminal Procedure Rule 111 When a criminal action is instituted, the civil acti on for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action UNLESS the offended party waives the civil action, reserves the right to institute it separately or institutes the c ivil action prior to the criminal action. Extent of Civil Liability Art 104, RPC What is included in civil liability 1. Restitution thing itself is restored (Ar t 105, RPC) 2. Reparation of damage caused court determines amount of damage (Ar t 106, RPC) 3. Indemnification for consequential damages not only caused the 3rd party but also those suffered by his family or by a 3rd person by reason of the crime (Art 107, RPC) y Civil liability for crimes is extinguished the same caus es provided in the CC for the extinguishment of other obligations. GENERAL RULE: Criminal action bars civil action for the same offense y Civil action for recov ery of civil liability arising from the offense is impliedly instituted with the criminal action EXCEPTIONS: y Offended party reserves the right to institute it separately y The law provides for an independent civil action (i.e. civil actio n may proceed to final judgment irrespective of result of the criminal action an d filing of the criminal action does not suspend the civil action) o obligations arising from the act or omission claimed to be criminal (Art 31) o violations o f constitutional rights and liberties of individuals (Art 32) o defamation, frau d or physical injuries (Art 33) o refusal or failure of members of police force to render protection to life or property (Art 34) E. QUASI-DELICTS [Quasi Ex-Del icto, Quasi Ex-Maleficio, Culpa Aquilana, Tort (common law)] Art 1162 Obligation s derived from quasi-delicts shall be governed by the provisions of Chapter 2, T itle XVII of this Book and by special laws. Art 2176 Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence when there is no pre-existing contrac tual relation between the parties, is called quasi-delict and is governed by the provisions of this Chapter. BASIS: Undisputable principle of equity; fault or n egligence cannot prejudice anyone else besides its author and in no case should its consequences be borne by him who suffers the harm produced by such fault or negligence. - Man is responsible not only for his voluntary willful acts, execut ed consciously and intentionally but also for those acts performed with lack of foresight, care and diligence, which cause material harm to society or to other individuals. NEW SOURCES OF OBLIGATION generally recognized by law although not included in the code 1. Unjust enrichment (CC categorized under quasi-contract) 2. Unilateral declaration of will 3. Abuse of rights (CC categorized under quasi -delict) Test of Negligence: Would a prudent man, in the position of the person to whom negligence is attributed, foresee harm to the person injured as a reason able consequence of the course about to be pursued? ELEMENTS a) b) c) OF NEGLIGE NCE duty on the part of the defendant to protect the plaintiff from injury of wh ich the latter complains failure to perform such duty an injury to the plaintiff through such failure Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 7 of 110 KINDS OF NEGLIGENCE 1. Culpa aquilana or culpa extra-contractual; negligence as a source of obligation, a quasi-delict 2. Culpa contractual negligence in the pe rformance of a contract 3. Culpa criminal criminal negligence Distinction betwee n Culpa Aquilana and Culpa Contractual CULPA AQUILANA (culpa extra-contractual) Governed by Art 2176 to 2194 Negligence as a source of obligation Fault or negligence which constitutes an independent source of obligation between parties not previously bound Negligence of defendan t should be the proximate cause of damage if liability is to attach CULPA CONTRA CTUAL Governed by Art 1179 et sequel Negligence in the performance of a contract Fault or negligence of the debtor as an incident in the fulfillment of an exist ing obligation Distinction between Quasi-delicts and Crimes AS TO Nature of right violated; - An obligation can arise from both crime and qu asi-delict at the same time (e.g. physical injuries) BUT can only recover damage once and not twice Condition of mind QUASI-DELICT Private rights; wrong against the individual CRIMES Public right; wrong against the state Legal basis of liability Criminal intent is not necessary. Possible that there is not criminal charge but only civil liability for damages arising from quasi-delict Actionable in any ac t or omission wherein fault or negligence intervenes Liability for damages to th e injured party Criminal intent is necessary for the existence of liability, without it, there c an be no crime Not as broad as quasi-delict, can be punished only when there is a penal law clearly penalizing it Certain crimes do not have civil liability e.g . contempt, gambling, violations of ordinances and traffic regulations when nobo dy is injured Fine (accruing to the public treasury), imprisonment or both punis hment Beyond reasonable doubt Can never be compromised Liability for damages Forms of redress Amount of evidence Compromise Reparation of the injury suffered by the injured party compensation, indemnifica tion Preponderance of evidence Can be compromised as any other civil liability Requisites of Liability under Quasi-Delicts 1. There exists a wrongful act or om ission imputable to the defendant by reason of his fault or negligence 2. There exists a damage or injury 3. Direct causal connection or relation of cause and e ffect between the fault or negligence and the damage or injury OR that the fault or negligence be the cause of damage or injury o DOCTRINE OF PROXIMATE CAUSE: s uch adequate and efficient cause as, in the natural order of events, and under t he particular circumstance surrounding the cause, would necessarily produce the event o NATURAL AND PROBABLE CAUSE: either when it acts directly producing the i njury, or sets in motion other causes so producing it and forming a continuous c hain in natural sequence down to the injury o CONCURRENT CAUSE: if two causes op erate at the same time to produce a result which might be produced by either ind ependently of the other, each of them is a proximate cause o When the plaintiff s own negligence was the immediate and proximate cause of his injury, he cannot recover damages. o BUT if negligence is only contributory, the immediate and pro ximate cause of the injury is defendant s lack of due care, the plaintiff may re cover damages, the courts shall mitigate the damages to be awarded (Art 2179)

Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 8 of 110 Liability for fault of others - Obligation arising from quasi-delict is demandab le not only for one s own acts or omissions, but also for those of persons for w hom one is responsible. Art 2180 The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsibl e. The father and, in case of his death or incapacity, the mother, are responsib le for the damages caused by the minor children who live in their company. Guard ians are liable for damages caused by the minors or incapacitated persons who ar e under their authority and live in their company. The owners and managers of an establishment or enterprise are likewise responsible for damages caused by thei r employees in the service of the branches in which the latter are employed or o n the occasion of their functions. Employers shall be liable for the damages cau sed by their employees and household helpers acting within the scope of their as signed tasks, even though the former are not engaged in any business or industry . The State is responsible in like manner when it acts through a special agent; but not when the damage has been caused by the official to whom the task done pr operly pertains, in which case what is provided in Article 2176 shall be applica ble. Lastly, teachers or heads of establishments of arts and trades shall be lia ble for damages caused by their pupils and students or apprentices, so long as t hey remain in their custody. The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the dilige nce of a good father of a family to prevent damage. Art 218, FC The school, its administrators and teachers, or the individual, entity or institution engaged in child are shall have special parental authority and responsibility over the min or child while under their supervision, instruction or custody. Authority and re sponsibility shall apply to all authorized activities whether inside or outside the premises of the school, entity or institution. Art 219, FC Those given the a uthority and responsibility under the preceding Article shall be principally and solidarily liable for damages caused by the acts or omissions of the unemancipa ted minor. The parents, judicial guardians or the persons exercising substitute parental authority over said minor shall be subsidiarily liable. The respective liabilities of those referred to in the preceding paragraph shall not apply if i t is proved that they exercised the proper diligence required under the particul ar circumstances. All other cases not covered by this and the preceding articles shall be governed by the provisions of the Civil Code on quasi-delicts. Diligence of Employers An employer may be held civilly liable for the quasi-delict or crime of his empl oyee. LIABILITY OF EMPLOYERS FOR EMPLOYEES CRIME (Art 103, RPC) Subsidiary, employee m ust have first been convicted and sentenced to pay civil indemnity and it must b e shown that he is insolvent in order that employee may be liable Liability is a bsolute and cannot avail of the defense by proof of such diligence Employer is l iable only when he is engaged in some kind of business or industry (during perfo rmance of duty) LIABILITY OF EMPLOYERS FOR EMPLOYEES QUASI-DELICT (Art 2180, CC) Primary, can be sued directly by the injured party and after he has paid the damages to such in jured party, he can recover from his employee amount paid by him Employer can av oid liability by proving that he exercised the diligence of a good father of a f amily to prevent damage All employers, whether they are engaged in some enterpri se or not, are liable for the acts of their employees including house helpers Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 9 of 110 CLASSIFICATIONS OF OBLIGATIONS A. Primary Classification under the Civil Code 1. WHEN: Pure and Conditional (Ar t 1179-1192) time of enforceability y PURE: demandable at once y CONDITIONAL: fu lfillment or extinguishment depends upon a future and uncertain event 2. WHEN: W ith a period or term (Art 1193-1198) time of demandability y PERIOD: its fulfill ment or extinguishment depends upon a future and certain event 3. WHAT: Alternat ive and Facultative (Art 1199-1206) multiple objects y ALTERNATIVE: multiple pre stations but debtor will perform one or some but not all, depending on whose cho ice it is y FACULTATIVE: multiple prestations with a principal obligation and su bstitute prestations, choice is generally given to the DEBTOR 4. WHO: Joint and Solidary (Art 1207-1222) multiple subjects, focuses on the tie that bonds the pa rties y JOINT: each can be made to pay only his share in the obligation y SOLIDA RY: one can be made to pay for the whole obligation subject to reimbursement 5. HOW: Divisible and Indivisible (Art 1223-1225) performance of the prestation, no t to the thing which is object thereof, whether it can be fulfilled in parts or not 6. With a penal clause (Art 1226-1230) B. Secondary Classification 1. Legal (Art 1158) from law Conventional (Art 1159) from contracts Penal (Art 1161) from commission of a crime 2. (As to subject matter) Real (to give) and Personal (to do or not to do) 3. (As to subject matter of obligation) Determinate and Generi c 4. Positive (to give, to do) and Negative (not to give, not to do) 5. Unilater al only one party bound to perform obligation, one debtor and one creditor (e.g. simple and remuneratory donation, to give support) Bilateral OR synallagmatic c ontracts, emptio vendito; two parties are reciprocally bound thus debtor and cre ditor of each other (e.g. purchase and sale, ease) 6. Individual Collective only one subject several subject accessory undertaking to assume greater liability i n case of breach 7. Accessory depends on the principal obligation e.g. pledge, mortgage Principal main obligation 8. As to object or prestation a. Simple only one prestation b. Multiple two or more prestation i. Conjunctive all must be performed ii. Distrib utive one or some must be performed a. Alternative more than one prestation but one party may choose which one; several are due but only one must be fulfilled a t the election of the debtor b. Facultative main prestation and a substitute pre station and it is the debtor who chooses; only one thing is due but the debtor h as reserved the right to substitute it with another Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 10 of 110 9. Possible capable of being performed, either physically or legally Impossible physically or legally incapable of being done Chapter II. Nature and Effects of Obligations KINDS OF PRESTATION A. Obligation TO GIVE SPECIFIC THING (determinate) One that is individualized and can be identified or distinguished from others of its kind GENERIC THING (indeterminate) Indicated o nly by its kind, without being designated and distinguished from others of the s ame kind Object due becomes determinable from moment of delivery Specific thing (determinate) DUTIES OF THE OBLIGOR (Letters B-D are the accessory/incidental obligations) a. to deliver thing itself Art 1244 Par 1 The debtor of a thing cannot compel the c reditor to receive a different one, although the latter may be of the same value as, or more valuable than which is due. - Though upon agreement or consent of t he creditor, the debtor may deliver a different thing or perform a different pre station in lieu of that stipulated DATION in payment (Art 1245) or OBJECTIVE NOV ATION (Art 1291) - Defects of the thing may be waived by the creditor IF o Expre ssly declares o With knowledge thereof, he accepts the thing without protest or disposes or consumes it waiver of defect b. to preserve thing with due care Art 1163 Every person obliged to give something is also obliged to take care of it w ith the proper diligence of a good father of a family, UNLESS the law or the sti pulation of the parties requires another standard of care. - Why: the obligation to delivery would be illusory. - What kind of diligence: DILIGENCE OF GOOD FATH ER OF FAMILY; elaborated in Art 1173 o Failure to preserve the thing Liability f or damages o BUT if due to FORTUITOUS EVENTS or FORCE MAJEURE Exempted from resp onsibility c. to deliver the accessions and accessories Art 1166 Obligation to g ive a determinate thing includes that of delivering all its accessions and acces sories, even though they may not have been mentioned. - May be qualified by cont rary intentions of the parties, e.g. exclude delivery of accession or accessory of the thing. ACCESSIONS Includes everything which is produced by a thing, or which is incorpo rated or attached thereto, either naturally or artificially. Does not include fr uits because Art 1164 mentioned it already Accesion continua which includes: 1. Accesion natural e.g. alluvion 2. Accesion industrial e.g. building, planting, s owing ACCESSORIES Those things which, destined for embellishment, use or preserv ation of another thing or more important, have for their object the completion o f the latter for which they are indispensable or convenient. d. to deliver the fruits Art 1164 Par 1 The creditor has a right to the fruits o f the thing from the time the obligation to deliver it arises. However, there is no real right until the same has been delivered to him. - Non nudis pactis, sed traditione domina rerum trasferentur the ownership of things is transferred not only by mere agreements but by delivery Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 11 of 110 REAL RIGHT power belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally exerc ised - Gives to a person a direct and immediate power over a thing, which is sus ceptible of being exercised, not only against a determinate person but against t he whole world - E.g. rights of ownership and possession PERSONAL RIGHT power be longing to one person to demand of another, as a definite passive subject, the f ulfillment of a prestation to give, to do or not to do CORRELATIVE RIGHTS OF THE OBLIGEE/CREDITOR (from Sir Labitag s diagrammatical outline) 1. Right to compel delivery a. Fruits (both industrial and natural from the time obligation to del iver arises), accessions and accessories b. No real right until delivery persona l action against debtor, no right against the world 2. Right to rescission or re solution 3. Right to damages a. Failure to deliver Legal excuse for breach of ob ligation or delay: FORTUITOUS EVENT unless there is o Law e.g. possession in bad faith (Art 552) o Stipulation to the contrary o Nature of obligation requires a ssumption of risk FE APPLICABLE TO: o Nonperformance o Delay o Loss/deterioratio n of specific thing Art 1189 Before happening of suspensive condition Art 1190 B efore happening of resolutory condition Debtor still liable despite FE: o Expres sly specified by law Art 1942 Bailee liable for loss (commodatum) Art 2001 Act o f a thief Art 2147 Negotiorum gestio Art 1993 Loss of deposit o Stipulation e.g. debtor becomes insurer of the obligation o Assumption of risk o Fraud or malice (bad faith) Art 1165 Par 3 Delivers to two or more persons having different int erest o Debtor in delay already when FE happened (Art 1165 Par 3) o Debtor guilt y of concurrent negligence in this case, no long FE o Liability arises from crim inal act except if debtor tenders thing and creditor unjustifiably refuses to re ceive (Art 1268) b. Fraud c. Negligence in performance d. Delay or default e. An y manner in contravention of the tenor of obligation Generic thing (indeterminate) Art 1246 When the obligation consists in the delivery of an indeterminate or gen eric thing, whose quality and circumstances have not been stated, the creditor c annot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shal l be taken into consideration. y Creditor may ask for compliance by 3rd person a t debtor s expense; action for substituted performance (Art 1165) LIMITED GENERI C THING determinate object generic objects confined to a particular class, the c lass is considered in itself a CORRELATIVE RIGHTS OF THE OBLIGEE/CREDITOR (from Sir Labitag s diagrammatical ou tline) 1. Right to ask for rescission or damages 2. Right to damages Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 12 of 110 a. b. c. d. e. Failure to deliver Fraud (malice or bad faith) Negligence Delay Any matter contr avene the tenor of obligation RIGHTS OF A CREDITOR (from BarOps Reviewer 2008) SPECIFIC To compel specific performance To recover damages, in case of breach of the obligation, exclusive or in addition to specific performance Entitlement to fruits, interests from the time obligation to deliver arises GENERIC To ask for the performance of the obligation To ask that the obligation be complied with a t the expense of the debtor To recover damages in case of breach of obligation B. Obligation TO DO Art 1244 Par 2 In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obli gee s will. - Exception: FACULTATIVE OBLIGATION wherein the debtor reserves the right to substitute another prestation Art 1167 If a person is obliged to do som ething fails to do it, the same shall be executed at his cost. The same rule may be observed if he does it in contravention of the tenor of the obligation. Furt hermore, it may be decreed that what has been poorly done be undone. DUTIES OF O BLIGOR (from BarOps Reviewer 2008) 1. To do it (Art 1167) 2. To shoulder the cos t if someone else does it (Art 1167) 3. To undo what has been poorly done (Art 1 167) 4. To pay damages (Art 1170-1172, 2201-2202) y No action for compliance bec ause that would be involuntary servitude which is prohibited by the constitution . C. Obligation NOT TO DO Art 1244 Par 2 In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee s will. - Performance cannot be by a delegate or an agent - No legal acc essory obligations arise (as compared to obligation to give) Art 1268 When the o bligation consists in not doing, and the obligor does what has been forbidden hi m, it shall also be undone at his expense. DUTIES OF OBLIGOR (from BarOps Review er 2008) 1. Not to do what should not be done 2. To should the cost to undo what should not have been done (Art 1168) 3. To pay damages (Art 1170, 2201-2202) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 13 of 110 BREACH OF OBLIGATION CONCEPT VOLUNTARY arises from the modes provided in Art 1170 INVOLUNTARY arises because of fortuitous events Distinction between SUBSTANTIAL and CASUAL/SLIGHT b reach SUBSTANTIAL Total Amounts to non-performance Basis for rescission and payment of damages CASUAL Partial A part is performed Gives rise to liability for damages GENERAL RULE: Rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental a s to defeat the object of the parties in making the agreement. Cases: y Song Fo v Hawaiian Phils y Velarde v CA MODES OF BREACH Art 1170 Those who in the perfor mance of their obligations are guilty of FRAUD, NEGLIGENCE, or DELAY and those w ho in any manner CONTRAVENE THE TENOR thereof, are liable for damages. 1 FRAUD (Dolo) Concept Fraud is the voluntary execution of a wrongful act, or a willful omissio n, knowing and intending the effects which naturally and necessarily arise from such act or omission. - Deliberate and intentional evasion of the normal fulfill ment of obligations - Any voluntary and willful act or omission which prevents t he normal realization of the prestation, knowing and intending the effects which naturally and necessarily arise from such act - Fraud in the performance of a p re-existing obligation - Cannot cover mistake and errors of judgment made in goo d faith, ergo synonymous to bad faith (dishonest purpose or some moral obliquity and conscious doing of wrong) - The element of INTENT and NOT the harm done is the test KINDS OF FRAUD 1. Fraud in the performance (Art 1171) 2. Fraud in the e xecution/creation/birth of the contract a. Dolo causante (Art 1344) b. Dolo inci dente (Art 1338) FRAUD (Art 1171) WHEN PRESENT PURPOSE During the performance of a preexisting ob ligation Evade the normal fulfillment of obligation DOLO CAUSANTE (Art 1338) Dur ing the perfection of a contract Secure the consent of another to enter into con tract DOLO INCIDENTE (Art 1344) During the perfection of a contract Secure the c onsent of another to enter into contract BUT fraud was not the principal inducem ent in making the contract Does not result in the vitiation of consent Gives ris e to a right of the innocent party to claim for damages RESULTS IN GIVES RISE TO Breach of the obligation Right in favor of creditor to recover damages Vitiation of consent; Voidable contract Right of the innocent party to annul the contract Cases: y Woodhouse v Halili y Geraldez v CA Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 14 of 110 Non-waiver of Future Fraud Art 1171 Responsibility arising from fraud is demanda ble in ALL OBLIGATIONS. Any waiver of action for future fraud is VOID. - To perm it such advance renunciations would practically leave the obligation without eff ect. - The law does not prohibit the renunciation of the action for damages on t he ground of fraud already committed. Effects of Fraud - Liability for damages, a crime or a quasi-delict (Art 1170) 2 NEGLIGENCE (Culpa contractual) Art 1172 Responsibility arising from negligence in the performance of EVERY KIND OF OBLIGATION is also demandable, but such liability may be REGULATED BY COURTS , according to the circumstances. Concept absence of due diligence Art 1173 Par 1 The fault or negligence of the obligor consists in the omission o f that diligence which is required by the nature of obligation and corresponds w ith the circumstances of the persons, of the time and the place. When negligence shows BAD FAITH, the provisions of Art 1171 (responsibility arising from fraud) and Art 2201 Par 2 (responsible for all damages reasonably attributed to non-pe rformance) shall apply. y Art 2201 Par 2 In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be R EASONABLY ATTRIBUTED to the non-performance of obligation. Distinction between C ulpa and Dolo CULPA (Negligence) Mere want of care or diligence, not the voluntariness of act or omission Liability may be mitigated by courts Waiver for future negligence va lid if simple void if gross DOLO (Fraud) Willfulness or deliberate intent to cau se damage or injury to another Liability cannot be mitigated by courts Waiver fo r future fraud is void Distinction between Culpa Aquilana and Culpa Contractual y Different provisions that apply to the two concepts, hence different legal effects CULPA AQUILANA (Culpa Extra-contractual) Governed by Art 2176 to 2194 Negligence as a source of obligation Fault or negligence which constitutes an independent source of obligation between parties not previously bound CULPA CONTRACTUAL Gove rned by Art 1179 et sequel Negligence in the performance of a contract Fault or negligence of the debtor as an incident in the fulfillment of an existing obliga tion Negligence of defendant should be the proximate cause of damage if liability is to attach. Cases: y Gutierrez v Gutierrez y Vasquez v Borja Standard of care required Art 1 173 Par 2 If law or contract does not state diligence which is to be observed in the performance, that which is expected of a GOOD FATHER OF FAMILY is required. y Extra-ordinary diligence required in: o Art 1733 Common carriers o Art 1744 L esser than extraordinary o Art 1998-2002 Inn keepers, hotel keepers Exemption fr om Liability for Negligence 1. INSURANCE: A party to a contract is relieved from the effects of his fault or negligence by a 3rd person Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 15 of 110 2. Party to a contract renounces in advance the right to enforce liability arisi ng from the fault or negligence of the other a. VOID if gross negligence Stipula tions exempting from liability for that amount to a fraud b. VALID if simple neg ligence only Cases: y y y y De Guia v Manila Electric Co US v Barias Sarmiento v Sps Cabrido Crisostomo v CA Effects of Negligence 1. Damages are demandable, which the courts may regulate a ccording to circumstances 2. Invalidates defense of fortuitous event 3 DELAY (mora) Concept non-fulfillment of obligation with respect to time Art 1169 Those obliged to DELIVER or to DO something incur in delay from the tim e the OBLIGEE JUDICIALLY OR EXTRAJUDICIALLY DEMANDS from them the fulfillment of their obligations. However, the DEMAND by the creditor shall NOT be necessary i n order that delay may exist: 1. When the OBLIGATION or LAW expressly so declare s 2. When from the nature and the circumstances of the obligation it appears tha t the DESIGNATION OF THE TIME when the thing to be delivered or the service is t o be rendered was a controlling motive for the establishment of the contract 3. When demand would be USELESS, as when the obligor has rendered it beyond his pow er to perform In reciprocal obligations, neither party incurs in delay if the ot her DOES NOT COMPLY or is NOT READY to comply in a proper manner with what is in cumbent upon him. From the moment ONE of the parties fulfills his obligation, de lay by the other begins. y There can only be delay in positive obligations (to g ive and to do) and not in negative obligations (not to give and not to do). Kinds of Mora a. Mora solvendi default on the part of the debtor y EX RE referri ng to obligations to give y EX PERSONA referring to obligations to do REQUISITES OF MORA SOLVENDI 1. PRESTATION is demandable and already liquidated - There can be no delay if the obligation is not yet due. There is no mora in natural oblig ations because performance is optional and voluntary 2. That the debtor delays p erformance - Effects of mora only arise when the delay is due to the causes impu table to the debtor; hence there is legally no delay if this is caused by factor s not imputable to the debtor (e.g. fortuitous events) 3. That the creditor requ ires or demands the performance extrajudicially or judicially - Mere reminder is not a demand because it must appear that the benevolence and tolerance of the c reditor has ended. GENERAL RULE: Creditor should make demand before debtor incur s delay y Default begins from the moment creditor demands the performance of obl igation. o If extrajudicial: date of demand o If uncertain: date of filing of co mplaint (for purposes of computing payment of interests or damages) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 16 of 110 y y y Demand may be in any form, provided it can be proved. It is also generally neces sary even if a period has been fixed in the obligation. Burden of proof of deman d on the creditor. Demand must refer to the prestation that is due and not anoth er. But even if without demand, debtor incurs in delay if he acknowledges his de lay. Request for extension of time for payment is not sufficient though, the ack nowledgement must be express. Cases: y Cetus Devt Corp v CA y Santos Ventura Hoc orma Foundation v Santos y Vasquez v Ayala Corporation EXCEPTION: When demand is not required 1. Express stipulation Insertion of the c lause without further notice 2. Law so provides - Not enough to merely fix date for performance, but also that default will commence after the period lapses 3. Period is the controlling motive or the principal inducement for the creation of the obligation in cases where it appears that the obligation would not have bee n created for a date other than that fixed (Abella v. Francisco) 4. Demand would be useless performance has become impossible a. Caused by some act or fault of the debtor, e.g. hiding or disposed of the thing to be delivered b. Impossibilit y caused by fortuitous event but debtor bound himself liable in cases of such ev ents Case: y Abella v Francisco b. Mora accipiendi default on the part of the cr editor y Delay in the performance based on the omission by the creditor of the n ecessary cooperation, especially acceptance on his part. y Generally, debtor can perform at any time after the obligation has been created, even before the date of maturity. y It is necessary however that it be lawful for the debtor to perf orm, and that he can perform (e.g. when the period is established for the benefi t of the creditor or both of the parties). REQUISITES OF MORA ACCIPIENDI 1. Offe r of performance by the debtor who has the required capacity 2. Offer must be to comply with the prestation as it should be performed 3. Creditor refuses the pe rformance without just cause See also Art 1268 When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its pr ice, whatever may be the cause for the loss, UNLESS the thing having been offere d by him to the person who should receive it, the latter refused without justifi cation to accept it. Cases: y Vda de Villaruel v Manila Motor Co y Tengco v CA c. Compensatio morae p arties in a bilateral contract can regulate the order in which they shall comply with their reciprocal prestations. Otherwise, the fulfillment must be SIMULTANE OUS and RECIPROCAL GENERAL RULE: Fulfillment of parties should be simultaneous E XCEPTION: Contrary stipulation (e.g. installment plans) Case: y Central Bank v C A Effects of Mora A. Mora solvendi 1. When it has for its object a determinate t hing, the delay places the risk of the thing on the debtor 2. Debtor becomes lia ble for damages of the delay Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 17 of 110 B. Mora accipiendi 1. Responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence 2. Debtor is exempted from the risks of lo ss of thing, which automatically pass to the creditor 3. All expenses incurred b y the debtor for the preservation of the thing after the mora shall be chargeabl e to the creditor 4. If the obligation bears interest, the debtor does not have to pay it from the moment of the mora 5. The creditor becomes liable for damages 6. The debtor may relieve himself of the obligation by the consignation of the thing C. Compensation morae 1. Exceptio non adempleti contractus one is not comp elled to perform his prestation when the other contracting party is not yet prep ared to perform his prestation; default of one compensates the default of the ot her Cessation of effects of mora 1. Renunciation by the creditor a. Express b. I mplied: when after delay has been incurred, the creditor grants an extension of time to the debtor or agrees to a novation of the obligation 2. Prescription 4 CONTRAVENTION OF TENOR any illicit act which impairs the strict and faithful f ulfillment of the obligation or every kind of defective performance o Malicious or negligent violation of the terms and conditions stipulated in the obligation o Must not be due to fortuitous even or force majeure, otherwise there would be no liability o Immaterial whether or not the actor is in bad faith or negligent, what is required is that it is his fault or the act done contravenes their agre ement Cases: y y y y Chavez v Gonzales Telefast v Castro Arrieta v NARIC Magat v Media ldea 5 ABSOLUTE NON-PERFORMANCE REMEDIES OF CREDITOR IN CASE OF BREACH Primary Remedies: 1. Action for performance (specific performance or obtain comp liance) 2. Action for damages (exclusively OR in addition to either of the first actions) 3. Action for rescission Subsidiary 1. Accion Subrogatoria 2. Accion P auliana 3. Other specific Remedies A. ACTION FOR PERFORMANCE 1. Action for speci fic performance (in obligation to give specific thing) Art 1165 Par 1 When what is to be delivered is a determinate thing, the creditor, in addition to the righ t granted him by Art 1170 (indemnification for damages), may compel the debtor t o make the delivery. ROC 39, Sec 10 Execution, satisfaction and effect of judgme nt. y Implies that the basis is a contractual relation between plaintiff and def endants. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 18 of 110 2. Action for substituted performance (in obligation to give generic thing) Art 1165 Par 2 If the thing is indeterminate or generic, he may ask that the obligat ion be complied with at the expense of the debtor. y y Delivery of anything belo nging to the species stipulated will be sufficient. Debtor cannot avoid obligati on by paying damages if the creditor insists on the performance. 3. Action for substituted performance or undoing of poor work (in obligation to do) Art 1167 If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contr avention of the tenor of the obligation. Furthermore, it may be decreed that wha t has been done poorly be undone. y y The court has no discretion to merely awar d damages to the creditor when the act can be done in spite of the refusal or fa ilure of debtor to do so. EXCEPTION: Imposition of personal force or coercion up on the debtor to comply with his obligation tantamount to involuntary servitude and imprisonment for debt Cases: y Chavez v Gonzales supra y Tanguilig v CA 4. Action for undoing (in obli gation not to do) Art 1168 When the obligation consists in not doing, and the ob ligor does what has been forbidden him, it shall also be undone at his expense. y EXCEPTION: When the only feasible remedy is indemnification for the damages ca used: If has become impossible to undo the thing physically or legally If the ac t is definite and will not cease even if undone B. ACTION FOR DAMAGES Art 1170 Recoverable damages include any and all damages t hat a human being may suffer. Responsibility for damages is indivisible. C. ACTI ON FOR RESCISSION Art 1191 The power to rescind obligation is implied in recipro cal ones, in case one of the obligors should not comply with what is incumbent u pon him. The injured party may choose between FULFILLMENT and the RESCISSION of the obligation, with the payment of damages in either case. He may also seek res cission, even after he has chosen fulfillment, if the latter should become IMPOS SIBLE. The court shall decree the rescission claimed UNLESS there be a just caus e authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. Art 1192 In case both parties have committed breach of obligation, the liability of the first infractor shall be eq uitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be extinguished and each shall bear his own damages. y y y y The remedy is alternative. Party seeking rescission can only elect one between fulfillment and rescission. There can be no partial perf ormance and partial rescission. Only applies to reciprocal obligations, where th ere is reciprocity between the parties i.e. creditor debtor relations arise from the same cause or identity of cause Reciprocal obligations have a TACIT RESOLUT ORY CONDITION. Power to rescind: o Pertains to the injured party, party who did not perform not entitled to insist upon the performance of the contract by the d efendant or recover damages by reason of his own breach Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 19 of 110 Rights of injured party subordinated to the rights of a 3rd person to whom bad f aith is not imputable o Not absolute, not permitted in casual/slight breach, may only be claimed in substantial breach (Song Fo v. Hawaiian Philippines) o Resci ssion requires judicial approval to produce legal effect EXCEPTION: object is no t yet delivered AND obligation has not yet been performed If the obligation has not yet been performed: extrajudicial declaration of party willing to perform wo uld suffice; can refuse to perform if the other party is not yet ready to comply If the injured party has already performed: cannot extrajudicially rescind IF t he other party opposes the rescission (otherwise, rescission produces legal effe ct). In the case the other party impugns rescission, the court comes in either t o: a. Declare the rescission as properly made b. Give a period to the debtor in which to perform Effects of Rescission 1. Extinguishes obligatory relation as if it had never been created, extinction has a retroactive effect. Equivalent to i nvalidate the juridical tie, leaving things in their status before the celebrati on of the contract 2. Mutual restitution y EXPRESS RESOLUTORY CONDITION: automat ic resolution if one of the parties does not comply with his obligation. Often f ound in insurance contracts. Its nature is a facultative resolutory condition (T aylor v Uy Tieng) SUBSIDIARY REMEDIES OF CREDITOR 1 Accion Subrogatoria (subrogatory action) Art 1177 The creditors after having pursued the property in possession of the de btor to satisfy their claims, may exercise all the rights and bring all the acti ons of the latter for the same purpose, save those which are inherent in his per son; they may also impugn the acts which the debtor may have done to defraud the m. Concept Action which the creditor may exercise in place of the negligent debt or in order to preserve or recover for the patrimony of the debtor the product o f such action, and then obtain therefrom the satisfaction of his own credit. y P revious approval of court is not necessary y EXTENT: Plaintiff entitled only to so much as is needed to satisfy his credit, any balance shall pertain to the deb tor y Patrimony of the debtor (includes both present and future property) is lia ble for the obligations he may contract by being a legal guaranty in favor of hi s creditors. Hence, he cannot maliciously reduce such guaranty. y Double functio n: o Conserving the patrimony of the debtor by bringing into it property abandon ed or neglected by him o Making execution on such property thereafter Rights of Creditors 1. Levy by attachment and execution upon all the property of the debto r, except such as exempt by law from execution 2. Exercise all the rights and ac tions of the debtor, except such as are inherently personal to him 3. To ask for rescission of the contracts made by the debtor in fraud of their rights REQUISI TES OF ACCION SUBROGATORIA 1. Creditor has an interest in the right or action no t only because of his credit but because of insolvency of the debtor 2. Maliciou s or negligent inaction of the debtor in the exercise of his right or action of such seriousness as to endanger the claim of the creditor 3. The credit of the d ebtor against a third person is certain, demandable and liquidated o It is not e ssential that the creditor s claim be prior to the acquisition of the right by t he debtor 4. The debtor s right against 3rd person must be patrimonial, or susce ptible of being transformed to patrimonial value for the benefit of the creditor EXCEPTIONS TO ACCION SUBROGATORIA 1. Inherent rights of debtor a. Right to exis tence, exempting from the reach of creditors whatever he may be receiving as sup port b. Rights or relations of a public character Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 20 of 110 c. Rights of an honorary character d. Rights consisting of powers which have not been used i. Power to administer e.g. debtor fails to have some property leased the creditor cannot give it in lease for him ii. Power to carry out an agency o r deposit because purely personal acts iii. Power to accept an offer for a contr act e. Non-patrimonial rights e.g. action to establish the creditor s status as a legitimate or natural child, action for legal separation or annulment of marri age, and other rights arising from family relations f. Patrimonial rights not su bject to execution e.g. right to a government gratuity or pension g. Patrimonial rights inherent in the persons of the debtor e.g. right to revoke a donation by reason fo ingratitude, right to demand the exclusion of an unworthy heir 2. Art 772 Only those who at the time of the donor's death have a right to the legitim e and their heirs and successors in interest may ask for the reduction or inoffi cious donations. Those referred to in the preceding paragraph cannot renounce th eir right during the lifetime of the donor, either by express declaration, or by consenting to the donation. The donees, devisees and legatees, who are not enti tled to the legitime and the creditors of the deceased can neither ask for the r eduction nor avail themselves thereof. 3. Sec 13, Rule 39, Rules of Court 2 Accion Pauliana Art 1177 they may also impugn the acts which the debtor may have done to defraud them Art 1381 Par 3 Those undertaken in fraud of creditors when the latter cann ot in any other manner collect the claims due them. (Found under Rescissible Con tracts) Concept Creditors have the right to set aside or revoke acts which the d ebtor may have done to defraud them. All acts of the debtor which reduce his pat rimony in fraud of his creditors, whether by gratuitous or onerous title, can be revoked by this action. y Payments of pre-existing obligations already due, whe ther natural or civil, cannot be impugned by an accion pauliana. REQUISITES OF A CCION PAULIANA 1. Plaintiff asking for rescission (subsidiary action) has a cred it prior to the alienation, although demandable later 2. Debtor has made subsequ ent contract, giving advantage to a 3rd person 3. Creditor has no other remedy b ut to rescind the debtor s contract to the 3rd person (last resort) 4. Act being impugned is fraudulent o Presumption of fraud may be found in Art 1387 (gratuit ous transfer without leaving sufficient funds for obligations OR gratuitous tran sfers by a judgment debtor) More details in page 92 5. 3rd person who received t he property is an accomplice in the fraud o See Rescissible Contracts for more d etailed discussion on the effects of good faith and bad faith of the third party transferee (Page 89) Cases: y Khe Hong Cheng v CA y Siguan v Lim Distinction be tween accion subrogatoria and accion pauliana ACCION SUBROGATORIA Not essential that credit is prior to the acquisition of deb tor s right Intent to defraud creditors is not required No period of prescriptio n ACCION PAULIANA Credit must exist before fraudulent act If contracts rescinded is onerous, there must be fraudulent intent Action prescribes within 4 years of the discovery of the fraud 3 Other specific remedies (Accion Derecta) Art 1652 Lessor vs. sub-lessee Art 1729 Laborers vs. owner Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 21 of 110 Art 1608 Vendee a retro vs. vendee a retro s transferee Art 1893 Principal vs. s ubstitution appropriated by princip EXTINGUISHMENT OF LIABILITY IN CASE OF BREACH DUE TO FORTUITOUS EVENT Art 1174 Except in cases expressly specified by law, or when it is otherwise dec lared by stipulation, or when the nature of obligation requires the assumption o f risk, no person shall be responsible for those events which could not be fores een or which, though foreseen, were inevitable. Concept of Fortuitous Event [For ce Majeure, Fuerza Mayor, Caso Fortuito] A. Act of God by nature e.g. earthquake s, storms, floods, epidemics, fires, etc; all human agencies excluded B. Act of Man by acts of man, e.g armed invasion, attack by bandits, governmental prohibit ions, robbery, etc; for as long as that they have a force of an imposition which the debtor could not have resisted y Includes unavoidable accidents, even if th ere has been intervention of human element, provided that the fault or negligenc e cannot be imputed to the debtor Requisites of Fortuitous Event 1. Cause of the unforeseen and unexpected occurre nce or the failure of the debtor to comply with his obligation must be independe nt of human will 2. Impossible to foresee the event which constitute the caso fo rtuito (ordinary) OR if it can be foreseen, must be impossible to avoid (extraor dinary) 3. Occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner 4. Obligor must be free from any parti cipation in the aggravation of the injury resulting to the creditor (no concurre nt negligence) Effect of CONCURRENT FAULT of the Debtor When the negligence of a person concurs with an act of God in producing a loss, such person is not exemp t from liability by showing that the immediate cause of the damage was the act o f God. If he creates a dangerous condition or negligence although the act of God was the immediate cause, he cannot escape liability for the natural and probabl e consequence thereof. There must be NO fraud, negligence, delay or violation/co ntravention in any manner of the tenor of the obligation. When the effect is fou nd to be partly resulting from the participation of man, whether due to his acti ve intervention or neglect or failure to act, the whole occurrence is then human ized and removed from the rules applicable to the acts of God (NPC v CA the case of Welming and the exploding dam) Cases: y y y y y y y y Juan Nakpil & Sons v CA Republic v Luzon Stevedoring Dioquino v Laureano Austria v CA NPC v CA Yobido v CA Bacolod-Murcia Milling v CA Philcomsat v Globe Teleco m Extinguishment of Liability GENERAL RULE: No liability if there fortuitous event s intervene SPECIFIC APPLICATION: Non performance Delay Loss and deterioration o f a specific thing Art 1189 Loss without the fault of debtor in suspensive condi tion Art 1190 Loss without the fault of debtor in resolutory condition Art 1194 Loss without the fault of the debtor in suspensive period Art 1204 Loss of all a lternative prestations Art 1205 In alternative obligations, in case of loss of o ne alternative, creditor chooses from remainder Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 22 of 110 EXCEPTIONS: a. Cases specified by law Art 552 Par 2 Possessor in bad faith Art 2 001 Act of a thief Art 1165 Debtor s delay Art 2147 Officious management Art 194 2 Obligation of bailee in commodatum Art 2148 Negotiorum gestio Art 1268 Proceed s in a criminal offense Art 2159 Accepts undue payment in bad faith Art 1979 & A rt 1993 Depositary Art 1198 Loss of benefit to make use period b. Express stipul ation by the parties c. Assumption of risk - The principle is based on social ju stice, an ethico-economic sensibility of modern society which has noted the inju stices which industrial civilization has created - Applies to all kinds of publi c services but limited to risks and events that are typical of the business conc erned USURIOUS TRANSACTIONS Art 1175 Usurious transactions shall be governed by special laws. Art 1413 Inter est paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art 1961 Usurio us contracts shall be governed by the Usury Law and other special laws, so far a s they are not inconsistent with this Code. INTEREST the income produced by mone y in relation to its amount and to the time that it cannot be utilized by its ow ner. It can either be moratory or compensatory. o MORATORY paid in contractual o bligations to pay a sum of money, either as price for the use of the money OR as stipulated advanced determination of the damages due to the delay in the fulfil lment of the obligation. *mora = delay o COMPENSATORY interests on obligations w hich have an extra-contractual or delictual origin USURY contracting for or rece iving something in excess of the amount allowed by the law for the loan or forbe arance of money, good or chattels. It is also taking more interest for the use o f money, goods or chattels or credits than the law allows. TWO CONCEPTS ON PAYME NT OF INTEREST (from Sir Labitag s handout) A. Interest for the use or loan or f orbearance of money, goods or credit No interest for use or forbearance If no stipulation re: payment of interest: * No interest shall be due unless it has been expressly stipulated in writing (A rt 1956) If there is express stipulation (which must be in writing to be valid) for payme nt of interests, but no rate mentioned If there is stipulation in writing and ra te of interest is agreed upon (including commissions, premiums, fees and other c harges) Interest shall be 12% per annum (Sec. 2, Monetary Board Circular 905, 10 Dec 198 2) Such interest shall not be subject to ceiling prescribed under the Usury Law (Sec. 1, Monetary Board Circular 905, 10 Dec 1982)) B. Interest as damages for breach or default in payment of loan or forbearance o f money, goods, credit In case of DEFAULT, loan or forbearance shall earn legal interest, at rate of 12 % per annum from date of judicial or extrajudicial demand, subject to Art 1169 ( delay/mora) Loan + stipulated interest, shall earn 12% per annum from date of ju dicial demand If rate of interest stipulated, e.g. 24% per annum * Interest due shall earn legal interest from the time it is judicially demanded , although the obligation may be silent upon this point (Art 2212) No stipulation as to interest for use of money Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 23 of 110 C. If obligation NOT consisting of a loan or forbearance of money, goods or cred it is breached, e.g. obligation to give, to do, not to do o o Interest may be im posed at the discretion of court at the rate of 6% per annum. No interest adjudg ed on unliquidated claims or damages, until demand can be established with reaso nable certainty. After thus established with reasonable certainty, interest of 6 % per annum shall begin to run from the date of judicial or extrajudicial demand . But if obligation cannot be established with reasonable certainty at time of d emand, 6% per annum interest shall begin to run only from date of judgment on am ount finally adjudged by court. o o D. When judgment of court awarding money becomes final and executory, money judg ment is A, B and C (above) shall earn 12% per annum from finality of judgment un til full payment money judgment shall be considered as forbearance of credit (Ea stern Shipping Lines vs. CA, 1994) Monetary Board Circular # 905 lifting the int erest rate ceiling vs. Art 2209 MB 905 Interest can now be charged as lender and borrower may agree upon. It shall not be subject to any ceiling prescribed unde r or pursuant to the Usury Law as amended. Art 2209 If the obligation consists i n the payment of a sum of money, and the debtor incurs in DELAY, the indemnity f or damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. Cases: y y y y y y Eastern Shipping Lines v CA (see diagram on next page) Crismina Garments v CA Ke ng Hua Products v CA Security Bank v RTC Makati Almeda v CA First Metro Investme nt v Este del Sol Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 24 of 110 What kind of obligation? Rate of interest Accrual Payment of sum of money (i.e. loan or forbearance of money) Stipulated interest (1956) PLUS 12% of (principal debt + stipulated interest) (2 212) If no stipulation: 12% (as legal interest) Computed from judicial demand Computed from judicial or extrajudicial demand Obligation is breached Liquidated? Did court impose interest? (since "court discretion") 2210 Presupposes an "award of damages" for breach of obligation 6% (as legal interest in 2209) Computed from judicial or extrajudicial demand Computed from date of court 's judgment (at which time the quantification of dam ages may be deemed to have been reasonably ascertained Basis for computation is the amount finally adjudged. Other than payment of sum of money AND court imposed damages Yes Unliquidated i.e. cannot be reasonably established at time of demand? Must e stablish claim with "reasonable certainty first" (2213) No 6% (as legal interest in 2209) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 25 of 110 12% (as legal interest) Judgment of the court awarding sum of money becomes fina l and executory Because allegedly "forbearance of money" in the interim period.T hough the great Labitag don't agree much with this. Computed from time of finali ty until its satisfaction Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 26 of 110 FULFILLMENT OF OBLIGATIONS See Chapter 4: Payment Presumptions in payment of interests and installments Art 1176 The receipt of the principal by the creditor, without reservation with res pect to the interest, shall give rise to the presumption that interest has been paid. The receipt of a later installment of a debt without reservation as to pri or installments, shall likewise raise the presumption that such installments hav e been paid. y y GENERAL RULE: If the debt produces interests, payment of the pr incipal shall not be deemed to have been made unless the interests have been cov ered. PRESUMPTIONS are rebuttable by evidence TRANSMISSIBILITY OF RIGHTS Art 1178 Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. EXCEPTIONS: 1. Not transmissible by their very nature e.g. purely personal rights 2. There is a stipulation of the parties that they are not transmissible established or at t he very least, clearly inferable 3. Not transmissible by law not be easily implied but clearly Chapter III. Different Kinds of Civil Obligations I. Pure and Conditional Obliga tions A. PURE OBLIGATIONS Art 1179 Par 1 Every obligation whose performance DOES NOT d epend upon a future or uncertain event OR upon a past event unknown to the parti es is demandable at once. Contains no term or condition whatever upon which depe nds the fulfillment of the obligation contracted by the debtor. Immediately dema ndable and nothing would exempt that debtor from compliance therewith. B. CONDIT IONAL OBLIGATIONS Art 1181 In conditional obligations, the acquisition of rights , as well as extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. CONDITION every fut ure and uncertain event upon which an obligation or provision is made to depend even though uncertain, it should be possible must be imposed by the will of a pa rty and NOT a necessary legal requisite of the act e.g. promise to give donation propter nuptias if a person gets married is not conditional (DPN presupposes ma rriage) past event cannot be a condition because it is not a future and uncertai n event, more properly called as basis ; although proof of a past event may be a condition TERM not uncertain but must necessarily happen e.g. death of a person CONDITION Determines existence of an obligation PERIOD/TERM Determines demandabi lity of an obligation Kinds of Conditions 1. As to effect on obligation Art 1181 Acquisition of rights and extinguishment or loss of those already acquired Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] SUSPENSIV E Obligation arises The juridical or legal tie does not appear Obligation is a m ere hope Acquisition of rights Condition precedent/antecedent Page 27 of 110 RESOLUTORY Obligation is extinguished Tie of law is consolidated, becomes absolute The effect flow, but over it hovers possibility of termination like Sword of Damocles Extinguishment or loss of those already acquired Conditi on subsequent When condition fulfilled When condition not fulfilled Until it takes place Effec t Also known as Case: y Gonzales v Heirs of Tomas SUSPENSIVE (condition precedent/antecedent) y the obligation arises, but if the condition does not happen, obligation does not come into existence Retroactive effect when suspensive condition is fulfilled The binding tie of conditional obligation is produced from the time of perfecti on, not happening of condition. Can also be seen as Rights of creditor and debto r after fulfillment of the condition Case: y Coronel v CA Art 1187 The effects o f a conditional obligation to give, once the condition has been fulfilled shall retroact to the day of the constitution of the obligation. Nevertheless, when th e obligation imposes reciprocal prestations upon the parties, the fruits and int erests during the pendency of the condition shall be deemed to have been mutuall y compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, UNLESS from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting t he same was different. In obligations to do or not to do, the courts shall deter mine, in each case, the retroactive effect of condition that has been complied w ith. OBLIGATION TO GIVE Bilateral (reciprocal obligation) - deemed to have been mutually compensated Unilateral - debtor shall appropriate fruits and interests received, UNLESS there was a different intention y y y OBLIGATION TO DO or NOT T O DO Courts shall determine the retroactive effect of the condition y Until the fulfillment of suspensive condition, creditor cannot enforce the oblig ation as his right then was merely an expectancy. However, upon happening, the d ebtor can be compelled to perform. REASON FOR RETROACTIVITY: Condition is only a ccidental and not an essential element of the obligation. The obligation is cons tituted when the essential elements which give rise there to concur. Contracts e ntered into PENDENTE CONDITIONE (before happening of suspensive condition) o CRE DITOR transfers his rights prior to happening of condition e.g. mortgage over th e property to be delivered to him Effect: consolidate or makes effective the act performed. o DEBTOR: cannot alienate or dispose the thing, if he does so, all s uch contracts are abrogated and cease to have any effect upon happening of the s uspensive condition. But because delivery transfers real right over the thing: y 3rd person in good faith retains ownership; debtor becomes liable to creditor f or damages. y 3rd person is in bad faith he may be compelled to deliver the thin g to the creditor. LIMITATIONS ON RETROACTIVITY (as dictated by justice and requ ired by practicability or convenience): o loss of the thing by fortuitous event, debtor suffers the loss because he is still the owner o acts of administration before fulfillment not affected by retroactivity; however abuse of rights in gui se of administration are not allowed to defeat rights of creditor o usufructuary rights not within the principle of retroactivity of conditional obligations Rights of creditor and debtor before fulfillment of condition Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 28 of 110 Art 1188 The creditor, may before the fulfillment of the obligation, bring the a ppropriate action for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. y y No preference of credit is granted to the creditor but only allows him to br ing proper action for the preservation of his rights. PAYMENT BEFORE HAPPENING O F CONDITION: Debtor may only recover what he paid by mistake before happening of suspensive condition, hence if condition has been fulfilled, he can no longer c laim because of retroactivity of the condition. - If the payment was for a deter minate thing: accion reivindicatoria (for inexistent contracts) - Otherwise (not a determinate thing): solutio indebiti - If the payment was with knowledge of c ondition: implied waiver of condition and cannot recover - If the payment was wi th knowledge but the condition did not happen: debtor can recover lest the credi tor will be unjustly enriched. - The law is silent as to whether fruits may be r ecovered like in Art 1195, but Tolentino says we can apply principle of solutio indebiti, especially if creditor is in bad faith (knew that the debtor is paying before the suspensive condition has happened). Sir Labitag says yes, though. It follows the same rules. RESOLUTORY (condition subsequent) y extinguishes rights and obligations already existing Cases: y Parks v Province of Tarlac y Central Philippine University v C A y Quijada v CA 2. As to cause or origin Art 1182 When the fulfillment of the c ondition depends upon the sole will of the debtor the conditional obligation sha ll be VOID. If it depends upon chance or upon the will of a 3rd person, the obli gation shall TAKE EFFECT in conformity with the provisions of this Code. POTESTA TIVE One which depends upon the will of one of the contracting parties; in the p ower of one of the parties to realize or prevent KINDS OF POTESTATIVE CONDITION 1. Simple potestative presupposes not only a manifestation of will but also the realization of an external act - On the part of the debtor: Does not prevent for mation of valid obligation because in part depends on contingencies over which h e has no control 2. Purely potestative depends solely and exclusively upon the w ill - Destroys the efficacy of the legal tie - Effect if fulfillment of conditio n depends solely on the will of the debtor VOID because it is a direct contraven tion of Art 1308 on mutuality of contracts and to do so is to sanction illusory conditions - If depends exclusively on the will of creditor VALID - Applicable o nly to SUSPENSIVE and NOT to RESOLUTORY - Hence, resolutory potestative (faculta tive) conditions are perfectly valid, even if made to depend upon the obligor/de btor, since the obligation is already in force Debtor s promise to pay when he c an is not a conditional obligation Art 1180 When the debtor binds himself to pay WHEN his means permit him to do so, the obligation shall be deemed to be one wi th a period subject to the conditions of Art 1197 (period was intended). - Credi tor will have to ask the court to fix a period because an immediate action to en force the obligation would be premature. Case: y Lim v CA Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 29 of 110 CASUAL depends exclusively upon chance, will of a third person or other factors, and not upon the will of the contracting parties Case: y Naga Telephone Co, Inc v CA MIXED persons depends upon the will of one of the contracting parties and other circumstances, including the will of third Cases: y y y y y y Osmena v Rama Hermosa v Longora Taylor v Uy Tieng Piao Smith Bell v Sotelo Matti Rustan Pulp and Paper Mills v IAC Romero v CA 3. As to possibility Art 1183 IMPOSSIBLE CONDITIONS, those contrary to good cust oms or public policy and those prohibited by law shall annul the obligation whic h depends upon them. If the obligation is DIVISIBLE, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The conditi on not to do an impossible thing shall be considered as not having been agreed u pon. IMPOSSIBLE may either be physical (contrary to the law of nature) or juridi cal (contrary to law, morals, good customs, and public policy AND restricts cert ain rights which are necessary for the free development of human activity i.e. p olitical rights, family rights and constitutional rights and liberties e.g. cond ition not to change domicile, religion or contract marriage) ILLICIT CHARACTER d etermined not by the facts but by the effect upon one of the parties. Thus, the criterion is subjective. Not the act but the intention and its effect that deter mine the illicit character of the condition. - Why? Impossibility of fulfillment implies he does not intend to be bound, thus the nullity of the promise Effect of Impossible Conditions y Annuls only obligations which are POSITIVE and SUSPEN SIVE. In the case of a negative impossible condition, it s considered as not wri tten and the obligation is converted to a pure and simple one. y Applies only to contracts and not to simple and testamentary donations and to testamentary disp ositions y Impossibility of condition must exist at the time of the creation of the obligation (not existence of a valid obligation subsequently rendered imposs ible under Art 1266 on subsequent impossibility ) y DIVISIBLE OBLIGATION: part n ot affected by the impossible condition shall remain valid GENERAL RULE: Impossi ble condition annuls the obligation dependent upon them EXCEPTIONS: o Pre-existi ng obligation o Testamentary disposition o Divisible obligation o Negative impos sible things o Simple or remuneratory obligation Case: y Roman Catholic Archbish op of Manila v CA 4. As to mode POSITIVE (suspensive) Art 1184 The condition tha t some event happen at a determinate time shall EXTINGUISH the obligation as soo n as the time expires OR if it has become indubitable that the event will not ta ke place. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 30 of 110 y If there is no period fixed, the rule in Par 2 of Art 1185 is applicable. Intent ion of the parties is controlling, and the time shall be that which the parties may have probably contemplated, taking into account the nature of the obligation . NEGATIVE (suspensive) Art 1185 The conditions that some event will not happen at a determinate time shall render the obligation EFFECTIVE from the moment the ti me indicated has elapsed OR if it has become evident that the event cannot occur . If no time has been fixed, the condition shall be deemed fulfilled at such tim e as may have probably been contemplated, bearing in mind the nature of obligati on. LOSS, DETERIORATION or IMPROVEMENT pending happening of the condition Art 1189 When the conditions have been imposed with the intention of SUSPENDING the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: If the thing is 1. Loss without fault of debtor: obligation ex tinguished 2. Loss through the fault of debtor: obliged to pay damages. A thing is loss when it: a. Perishes b. Goes out the commerce of man c. Disappears in su ch a way that its existence is unknown or it cannot be recovered 3. Deteriorates without fault of the debtor: impairment to be borne by the creditor 4. Deterior ates through the fault of debtor: creditor may choose between the rescission of the obligation and its fulfillment with indemnity for damages in either case 5. Improved by its nature, time: inure to the creditor 6. Improved at the expense o f the debtor: no other right than that granted to the usufructuary y y Applicabl e only to obligations to deliver a determinate or specific thing. NO application to generic objects (genus never perishes). Apply only in case suspensive condit ion is fulfilled. Art 1190 When the conditions have for their purpose the EXTINGUISHMENT of an obl igation to give, the parties, upon the fulfillment of the said conditions, shall return to each other what they have received. In case of the loss, deterioratio n, or improvement of the thing, the provisions which with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bou nd to return. As for obligations to do or not to do, the provisions of 2nd par o f Art 1187 (courts shall determine) shall be observed as regards the effect of t he extinguishment of obligation. LOSS 1. Perishes 2. Goes out of the commerce of man 3. Disappears in such a way that its existence is unknown or it cannot be recovered Any reduction or impairm ent in the substance or value of a thing which does not amount to a loss. The th ing still exists at the time the condition is fulfilled, but it is no longer int act, OR is less than what it was when the obligation was constituted. Anything a dded to, incorporated in, or attached to the thing that is due. DETERIORATION IMPROVEMENT Effect of loss or deterioration Without debtor s fault With debtor s fault LOSS Extinguished, unless there is a stipulation to the contrary. Mode of extinguishment Art 1262 Par 1 Liable to dam ages upon fulfillment of condition DETERIORATION Not liable for damage, creditor must accept the thing in impaired condition May demand the thing OR ask for res cission, in either case, creditor may recover damages

Effect of improvement MODE Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] By nature or time At debtor s expense Page 31 of 110 Inures to the benefit of the creditor by virtue of principle of retroactivity of conditional obligations Only usufructuary rights; Governed by Art 579 (useful i mprovements or for mere pleasure, remove if possible to remove without damage to property) and Art 580 (set off the improvements he may have made against any da mage) Effect of prevention of the fulfillment of the condition by the obligor Art 1186 The condition shall be deemed fulfilled when the obligor voluntarily prevents f ulfillment. CONSTRUCTIVE FULFILLMENT a condition which although not exclusively within the will of the debtor, may in some way be prevented by the debtor from h appening. REQUISITES: a. Intent of the obligor to prevent the fulfillment of the condition ESSENTIAL! b. Actual prevention of the compliance y y Why? Party to a contract may not be excused from performing his promise by the non-occurrence o f the event which he himself prevented. Also applicable to provocation of resolu tory conditions Cases: y Taylor v Uy Tieng Piao supra y Herrera v Leviste C. RECIPROCAL OBLIGATI ONS Art 1191 The power to rescind obligation is implied in reciprocal ones, in c ase one of the obligors should not comply with what is incumbent upon him. The i njured party may choose between FULFILLMENT and the RESCISSION of the obligation , with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become IMPOSSIBLE. The cou rt shall decree the rescission claimed UNLESS there be a just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. Art 1192 In case both parties have committed brea ch of obligation, the liability of the first infractor shall be equitably temper ed by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be extinguished and each shall bear his own damage s. Concept RECIPROCITY arises from identity of cause and necessarily, two obliga tions are created at the same time. Each party is a creditor and debtor of the o ther and they are to perform simultaneously. y Recognized implied or tacit resol utory condition imposed exclusively by law, even if there is no corresponding ag reement between parties it s also called RESOLUTION y Power to rescind is given to the injured party Alternative remedies of injured party in case of breach par tial rescission and partial fulfillment a. Action for Fulfillment injured party should choose only one, cannot ask for When fulfillment no longer possible, rescission takes place b. Action for Rescission y Requisites for rescission a. One of the creditors fai led to comply with what is incumbent upon him b. Obligor who performed chose res cission over fulfillment or performance is impossible c. The breach is substanti al so as to defeat the object of the parties in making the agreement be granted in slight or casual breach y How made Rescission requires judicial approval to p roduce legal effect it will not Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 32 of 110 y EXCEPTION: object is not yet delivered AND obligation has not yet been performed If the obligation has not yet been performed: extrajudicial declaration of part y willing to perform would suffice; can refuse to perform if the other party is not yet ready to comply If the injured party has already performed: cannot extra judicially rescind IF the other party opposes the rescission (otherwise, resciss ion produces legal effect). In the case the other party impugns rescission, the court comes in either to: a. Declare the rescission as properly made b. Give a p eriod to the debtor in which to perform Effects of Rescission 1. Extinguishes ob ligatory relation as if it had never been created Equivalent to invalidate the j uridical tie, leaving things in their status before the celebration of the contr act 2. Mutual restitution Rescission Art 1380 Distinguished from Resolution Art 1191 Art 1191 Resolution Art 1380 Rescission Presuppose contracts validly entered int o and existing Rescission v. Annulment: the latter there is a defect which vitia tes/invalidates the contract 2. Mutual restitution when declared proper Only by a party to the contract Party to the contract suffering lesion Third parties pre judiced by the contract Non-performance (implied tacit condition in reciprocal V arious reasons of equity provided by the grounds, obligation) mainly economic in jury or lesions Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for extension of time to perform obligation (whether slight rescission (cannot be refused if all the requisites are or casu al breach) satisfied) Only to reciprocal Unilateral, reciprocal Even when contra ct is fully fulfilled Principal Remedy Secondary/Subsidiary 1. Similarities Who may demand Grounds Scope of judicial control Kind of obli applicable to Char acter Cases: y y y y y y y y y y See also: Song Fo v Hawaiian Philippines Boysaw v Interphil Promotions UP v Delos Angeles De Erquiaga v CA Angeles v Calasanz Ong v CA Visayan Saw Mill v CA Deiparine v C A Iringan v CA Vda de Mistica v Sps. Naguiat Art 1786 (Partnership) Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner a s the vendor is bound with respect to the vendee. He shall also be liable for th e fruits thereof from the time they should have been delivered, without the need of any demand. Art 1788 (Partnership) A partner who has undertaken to contribut e a sum of money and fails to do so becomes a debtor for the interest and damage s from the time he should have complied with his obligation. The same rule appli es to any amount he may have taken from the partnership coffers, and his liabili ty shall begin from the time he converted the amount to his own use. (1682) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 33 of 110 Art 1484 (Sales) In a contract of sale of personal property the price of which i s payable in installments, the vendor may exercise any of the following remedies : (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Ca ncel the sale, should the vendee's failure to pay cover two or more installments ; (3) Foreclose the chattel mortgage on the thing sold, if one has been constitu ted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpai d balance of the price. Any agreement to the contrary shall be void. (1454-A-a) Art 1485 (Sales) The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has depriv ed the lessee of the possession or enjoyment of the thing. (1454-A-a) Art 1486 ( Sales) In the case referred to in two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n) RA 6552 Realty Installment Buyer Protection Act aka Maceda Law II. Obligation with a Period Art 1193 Obligations whose fulfillment a day certain has been fixed, shall be de mandable only when that day comes. Obligations with a resolutory period take eff ect at once but terminate upon arrival of the day certain. A day certain is unde rstood to be that which must necessarily come, although it may not be known when . If the uncertainty consists in whether the day will come or not, the obligatio n is CONDITIONAL, and it shall be regulated by the rules of the preceding Sectio n. Art 1180 When the debtor binds himself to pay WHEN his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the prov isions of Art 1197. Concept A space of time which, exerting an influence on obli gations a s a consequence of a juridical act, suspends their demandability or de termines their extinguishment. o Requisites of Period 1. Future 2. Certain 3. Po ssible Period/Term vs. Condition AS TO Fulfillment Influence on the obligation Time Will of the debtor TERM/PERIO D Event must necessarily come, whether known before hand OR at a time which cann ot be predetermined No effect on the existence, but only on their demandability or performance, HENCE, does not carry with it any retroactive effect Always to t he future If dependent on will of debtor, merely empowers court to fix such peri od CONDITION Event is uncertain Gives rise to an obligation or extinguishes one already existing May refer to past event not know to the parties If dependent on will of debtor, ANNUL Kinds of Period/Term 1. As to effect SUSPENSIVE (Ex die) Art 1193 Par 1 Obligati ons whose fulfillment a day certain has been fixed, shall be demandable only whe n that day comes. o Must lapse before the performance of the obligation can be d emanded o Think: incubating period o The obligor has the burden of proving any e xtension of the period by satisfactory evidence Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 34 of 110 o o SUSPENSION OF PERIOD: If a fortuitous event supervenes, the obligor is merely re lieved of the obligation to fulfill at that time, and does not stop the running of the period because in effect that would be an extension of the term of the co ntract. Force majeure cannot be deducted from the period stipulated. MORATORIUM LAWS: postponement of the fulfillment of an obligation, an extension of the peri od for the performance of the obligation, decreed by the statute. However, to me et constitutional requirements: The suspension should be definite and reasonable . RESOLUTORY (In diem) Art 1193 Par 2 Obligations with a resolutory period take ef fect at once but terminate upon arrival of the day certain. o Period after which the performance must terminate o Think: expiry date 2. As to expression EXPRESS when specifically stated IMPLIED when parties intended a period E.g. Art 1197 Par 3 (period has been cont emplated by the parties), Art 1180 (promise to pay when able), or when a person undertakes to do some work which can be done only during a particular season 3. As to definiteness DEFINITE refers to a fixed known date or time INDEFINITENESS event which will necessarily happen but the date of its happening is unknown The uncertainty of the date of occurrence in indeterminate period DO ES NOT convert it into a condition, so long as there is no uncertainty as whethe r it will happen or not. E.g. death of a person, movable religious holidays (Hol y Week), events in civil or political life (age of majority or becoming a qualif ied voter) Debtor promises to pay when able or little by little or as soon as po ssible Two steps in dealing with an indefinite period (from Sir Labitag s lectur e) 1. Make the indefinite period definite by asking for payment or making an ext rajudicial demand 2. Make judicial demand, then ask the courts to fix the period No need to file to actions, just ask for two prayers to avoid multiplicity of s uits: (1) fix period and (2) require the debtor to comply on the fixed period (a ction for specific performance) The 2-in-1 action discussed by Sir Labitag is ac tually contradictory with Tolentino s commentary. 4. As to source CONVENTIONAL/V OLUNTARY stipulated by the parties LEGAL period fixed by law; spread in the CC e.g. Art 1682 lease of rural land an d Art 1687 lease of urban land; Franchise agreement in the Constitution (for 25 years) JUDICIAL set by the courts in case of implied and indefinite periods (See : When courts may fix period) Rules in case of loss, deterioration or improvement before arrival of period Art 1194 In case of loss, deterioration or improvement of the thing before the arri val of the day certain, the rules in Art 1189 shall be observed. o Same as Art 1 189 Effect of loss or deterioration Without debtor s fault LOSS Extinguished, unless there is a stipulation to the c ontrary. Mode of extinguishment Art 1262 Par 1 DETERIORATION Not liable for dama ge, creditor must accept the thing in impaired condition Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] With debt or s fault Liable to damages upon fulfillment of condition Page 35 of 110 May demand the thing OR ask for rescission, in either case, credi tor may recover damages Effect of improvement MODE By nature or time At debtor s expense Inures to the benefit of the creditor by virtue of principle of retroactivity of conditional obligations Only usufruc tuary rights; Governed by Art 579 (useful improvements or for mere pleasure, rem ove if possible to remove without damage to property) and Art 580 (set off the i mprovements he may have made against any damage) Effect of payment in advance Art 1195 Anything paid or delivered before the arri val period, the obligor being unaware of the period OR believing that the obliga tion has become due and demandable, may be RECOVERED, with the fruits and intere sts. o Only applies to obligations to give o The action only lies before the arr ival of the day certain, when the day certain comes cannot recover o If the cred itor refuses, debtor will have to go to the court, but when judgment comes, the day certain has already arrived. Poor him. (Sir Labitag) o Manresa: good faith/b ad faith of the creditor in accepting the premature payment is immaterial o Tole ntino: In accordance with solutio indebiti, good faith of creditor makes him lia ble to restore the fruits and interests insofar as it benefited him. o The same principle as regards fruits and interest is true for payment before happening of suspensive condition in Art 1188 Par 2 o Fruits and interests not recoverable i n these cases: Reciprocal obligation and there has been a premature performance on both sides When the obligation is a loan on which the debtor is bound to pay interest When the period is exclusively for the benefit of the creditor, because the debtor who pays in advance loses nothing If payment was with knowledge of t he term, it cannot be recovered because it is considered as tacit waiver of the benefit of the term (not only fruits and interest, but also principal) Note Art 1197 Par 3 In every case, the court shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. Benefit of Period 1. For whose be nefit and its effects Creditor May demand performance anytime, but not compelled to accept before peri od expires E.g. payment of interest, wants to keep his money safely invested ins tead of having it in his hands, protects himself from sudden decline in purchasi ng power of the currency loaned May oppose a premature demand, but may validly p ay any time before period expires E.g. time to raise money Presumption in absenc e of stipulation or in case of doubt Creditor must give consent first before deb tor may pay in advance especially when creditor receives other benefits by reaso n of the term Debtor Both 2. Presumption for the benefit of BOTH the creditor and debtor Art 1196 Whenever in an obligation a period is designated, it is presumed to have been establishe d for the benefit of BOTH creditor and debtor, UNLESS from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or the other. Cases: y Lachica v Araneta y Ponce de Leon v Syjuco y Buce v CA 3. When debtor loses right to make use of period Art 1198 The debtor shall lose every right to make use of the period: Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 36 of 110 1) When after the obligation has been contracted, he becomes insolvent UNLESS he gives a guaranty or security for the debt dovetail with accion pauliana (prior credit although demandable later) 2) When he does not furnish to the creditor th e guaranties or securities which he has promised 3) When by his own acts he has impaired said guaranties or securities after their establishment, and when throu gh a fortuitous event they disappear, UNLESS he immediately gives new ones equal ly satisfactory 4) When the debtor violates any undertaking in consideration of which the creditor agreed to the period 5) When the debtor attempts to abscond s hows bad faith y y y y Par 1: insolvency need not be declared in an insolvency p roceeding, enough that he is in a state of financial difficulty that he is unabl e to pay his debts Par 3: impaired need not be total; disappear through fortuito us event total, used in the sense of loss Obligation becomes immediately due and demandable even if period has not yet expired; converted to a pure obligation D oes not apply to extension of period fixed by moratorium statutes When court may fix period Art 1197 If the obligation does not fix a period, but from its nature and circumstance it can be inferred that a period was intended, the courts may fix the duration thereof. Par 2 The courts shall also fix the dur ation of the period when it depends upon the will of the debtor. Par 3 The court s shall determine which period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be cha nged by them. 1. Period is implied a period was intended; also INDEFINITE PERIOD 2. Period depends solely on will of debtor o If it were condition: void Cases: y Araneta v Phil Sugar Estate Development y Central Philippine University v CA s upra III. Alternative Obligations plurality of objects Concept 1. Conjunctive all prestations must be performed to extinguish obligatio n 2. Disjunctive one or some prestations must be performed to extinguish obligat ion a. Alternative Debtor must perform one of several alternatives, choice belon gs to debtor UNLESS expressly given to creditor b. Facultative One principal pre station but one or more substitutes, choice belongs to DEBTOR ONLY y Absent indi cation that it is facultative, the presumption is that it is ALTERNATIVE because creditor would be at a disadvantage if facultative. Facultative is never presum ed. Art 1199 A person alternatively bound by different prestations shall completely perform one of them. Par 2 The creditor cannot be compelled to receive part of o ne and part of the other undertaking. Right of choice debtor unless expressly gr anted to creditor Art 1200 The right of choice belongs to the debtor, UNLESS it has been expressly granted to the creditor. Par 2 The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not h ave been the object of the obligation o Grant to creditor cannot be implied o Ch oice may also be entrusted by the parties to a third person o LIMITATIONS ON RIG HT OF CHOICE Right to choose is indivisible (cannot choose part of one and part of the other) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 37 of 110

Cannot choose prestations which are impossible, unlawful or could not have been the object of the obligation (Art 1200, Par 2) Effect of notice of choice y The effect of notice of choice is to limit the obli gation to the object or prestation selected, with all the consequences which the law provides. y The obligation is converted to a simple obligation to perform t he prestation chosen. y Once the selection has been communicated, it becomes irr evocable. When notice produces effect Art 1201 The choice shall produce no effec t except from the time it has been communicated. Notice of selection/choice may be in any form provided it is sufficient to make the other party know that elect ion has been made. o Orally o In writing o Tacitly tacit declaration of the sele ction may be done: performance by the debtor who has the right to choose or in t he acceptance of a prestation by the creditor when he has the right of selection when the creditor sues for the performance of one of the prestation o Any other unequivocal terms Law does not require the other party to consent to the choice made by the party entitled to choose. A mere declaration of the choice, communi cated to the other party is sufficient unilateral declaration of will Only possi ble EXCEPTION: Debtor has chosen a prestation which could not have been the obje ct of the obligation; creditor s consent thereto would bring about a novation of the obligation PLURALITY OF SUBJECT o Joint: choice must be consented by all, a s none of them can extinguish the obligation alone o Solidary: choice by one wil l be binding personally upon him, but not as to other (bakeeet?!) Right to choos e is not lost by the mere fact that the party entitled to choose delays in makin g his selection. o Sir Labitag: Substituted performance when the debtor does not want to make a choice, creditor can ask the court for a 3rd party e.g. clerk of court, sheriff, or any other knowledgeable 3rd person to choose Effect of loss or impossibility of one or all prestations Art 1202 The debtor shall lose the ri ght of choice, when among the prestations whereby he is alternatively bound, onl y one is practicable. Converted to a simple and pure obligation; The impossibili ty of the act must not be due to creditor s act where Art 1403 shall apply. Cred itor cannot claim damages, because it s the debtor s call Art 1203 If through th e creditor s act, the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. Impossibility due to creditor Art 1204 The creditor shall have a right to indemnity for damages wh en, through the fault of the debtor, a. ALL THE THINGS which are alternatively t he object of the obligation have been LOST or b. COMPLIANCE of the obligation ha s become IMPOSSIBLE. Par 2 The indemnity shall be fixed taking as a basis the VA LUE of the last thing which disappeared OR that of the service which last became impossible. Par 3 Damages other than the value of the last thing or service may also be awarded. Applies to cases where the debtor has the right to choose If o nly some of the prestations are lost/impossible, not liable for damages because he can still comply by performing the remaining prestations even if there is onl y one (Art 1202) LOSS THROUGH FORTUITOUS EVENTS: obligation is extinguished, deb tor not liable for damages Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 38 of 110 Art 1205 When the choice has been expressly given to the creditor, the obligatio n shall cease to be alternative from the day when the selection has been communi cated to the debtor. Par 2 Until then, the responsibility of the debtor shall be governed by the following rules: 1. If ONE of the thing is LOST through fortuit ous event, he shall perform the obligation by delivering that which the creditor should choose from the remainder, or that which remains if only one subsists. 2 . If the LOSS of ONE of the things occurs through the fault of the debtor, the c reditor may claim any of those subsisting, or the price of that which, through t he fault of the debtor has disappear, with a right to damages. 3. If ALL the thi ngs are LOST through the fault of the debtor, the choice by the creditor shall f all upon the price of any of them, also with indemnity for damages. Par 3 the sa me rules shall be applied to obligations to do or not to do, in case ONE, OR SOM E OR ALL of the prestations should become IMPOSSIBLE. FACULTATIVE OBLIGATION Art 1206 When only one prestation has been agreed upon, but the obligor may rend er another in substitution, the obligation is called facultative. Par 2 The LOST or DETERIORATION of the thing intended as a substitute through the negligence o f the obligor, does not render him liable. BUT once the substitution has been ma de, the obligor is liable for the loss of the substitute on account of his delay , negligence or fraud. Concept Only one prestation is due, but the obligor reser ved the right to render another in substitution Distinguished from Alternative O bligation AS TO Contents of the obligation Nullity of prestation ALTERNATIVE Various prest ations all of which constitute parts of the obligation Nullity of one prestation does not invalidate the obligation which is still in force with respect to thos e which have no vice Creditor can choose from the remainder Choice Effect of Los s (fortuitous event) Right to choose may be given to the creditor Only the IMPOS SIBILITY OF ALL the prestations due without fault of the debtor extinguishes the obligation FACULTATIVE Only the principal constitutes the obligation , the acce ssory being only a means to facilitate payment Nullity of the principal prestati on (e.g. when the object is unlawful or outside the commerce of man) invalidates the obligation. Creditor cannot demand the substitute even when this is valid. Only the debtor can choose the substitute prestation Impossibility of the princi pal prestation is sufficient to extinguish the obligation, even if the substitut e is possible. Loss of substitute does not make debtor liable, unless substituti on has been made Debtor is liable Loss of the substitute before substation does not render debtor liable Effect of Loss (through fault) Debtor not liable if other prestation still available If choice belongs to credi tor, loss of one alternative gives rise to liability Effects of Substitution o Before the substitution is effected, the substitute is not the prestation that is due. o IF the substitute prestation becomes impossib le due to the fault or negligence of the debtor obligation is not affected, and he cannot be held for damages, even if he acts with bad faith in rendering the s ubstitute impossible. o From the time the debtor communicates to the creditor th at he elects to perform the substitute prestation, substitution is effective. IV. Joint and Solidary Obligation plurality of subjects, the juridical tie that binds them

JOINT OBLIGATIONS Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 39 of 110 Concept Each of the debtors is liable only for a proportionate part of the debt, and each creditor is entitled only to a proportionate part of the credit. Each creditor can recover only his share of the obligation and each debtor can be mad e to pay only his part. Sir Labitag describes it as a thin plastic rope or strin g that binds the parties. Requisites of Joint Obligations 1. Plurality of subjec ts 2. Determination of the shares in the demandability of the fulfillment of the obligation Words used to indicate joint obligations o Mancomunada o Mancomunada Simple o Pro rata o We promise to pay used by two or more signers Presumptions in Joint Obligations Art 1207 The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, OR that each one of the latter is bound to ren der entire compliance with the prestations. There is a SOLIDARY LIABILITY only w hen the obligation expressly so states OR when the law OR the nature of the obli gation requires solidarity. Art 1208 If from the law, or the nature or the wordi ng of the obligations to which the preceding article refers the contrary does no t appear, the credit or debit shall be presumed to be divided as many equal shar es as there are creditors or debtors, the credits or debts being considered dist inct from one another, subject to the Rules of Court governing the multiplicity of suits. Joint character is presumed Equal shares Effects of Joint Obligation a . Extent of liability of debtor 1. Only with respect to his particular share in the debt 2. Vices of each obligation arising from the personal defect of a parti cular debtor or creditor does not affect the obligation or rights of the others 3. The insolvency of a debtor does not increase the responsibility of his co-deb tors nor does it authorize a creditor demand anything from his co-creditors 4. J OINT DIVISIBLE OBLIGATION: defense of res judicata is not extended from one debt or to another b. Extent of right of creditor 1. Demand by one creditor upon one debtor produces the effects of default only with respect to the creditor who dem anded and the debtor on whom the demand was made, but not with respect to others 2. Interruption of prescription by the judicial demand of one creditor upon a d ebtor does not benefit the other creditors nor interrupt the prescription as to other debtors c. In case y y y y of: Novation: Affects only the share of the joi nt co-debtor in whom the novation is created Compensation: Affects only the shar e of the joint co-debtor in whom the compensation takes place Confusion: Art 127 7 Confusion does not extinguish a joint obligation except as regards the share c orresponding to the creditor or debtor in whom the two characters concur. Remiss ion: Benefits only the joint co-debtor in whom the remission is granted, obligat ion extinguished SOLIDARY OBLIGATIONS Concept Each of the debtors is liable for the entire obligation, and each credit or is entitled to demand the whole obligation. Each creditor may enforce the ent ire obligation and each debtor may be obliged to pay it in full. Sir Labitag des cribes it as a solid steel cable that binds the parties. Solidary obligations ex ist only by: o Stipulation of the parties Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 40 of 110 o Law o Nature of obligation o Charge of condition is imposed upon legatees or h eirs o Imputed by final judgment upon several defendants Requisites of Joint Obl igations 1. Plurality of subjects 2. Determination of the shares in the demandab ility of the fulfillment of the obligation Words used to indicate joint obligati ons o Mancomunada solidaria o Joint and several o In solidum o I promise to pay followed by the signature of two or more persons o Individuall and collectively Sir Labitag s magic shortcut formula (applicable only to joint liability on both sides) o # of debtors x # of creditors = divisor of the total amount of obligat ion KINDS OF SOLIDARY OBLIGATIONS a. As to source Art 1208 From law, or the natu re or the wording of the obligation LEGAL Art 1915 Two or more principals appoin ted an agent for common transaction, solidarily liable to agent Art 1945 Two or more bailees to whom a thing is loaned in the same contracts (commodatum) Art 21 94 Joint tortfeasors Art 2146 Joint officious management, two or more managers A rt 2157 Joint payees in solutio indebiti (payment is not due) Art 119, RPC CONVE NTIONAL by stipulation of parties REAL nature of the obligation requires b. As t o parties bound ACTIVE solidarity of creditors; each has right to collect the wh ole of the prestation from the common debtor Mutual representation Each creditor s represents the other in the act of receiving the payment and in all other acts which tend to secure the credit or make it more advantageous Death of solidary creditor does not transmit the solidrity to each of his heirs but all of them ta ken together The credit and its benefit are divided equally among the creditors UNLESS there is an agreement among them to divide differently solidarity of debt ors; each is liable to pay the whole to the common creditor Mutual guaranty simu ltaneously active and passive PASSIVE MIXED c. As to uniformity UNIFORM same terms and condition for all VARIED/NON-UNIFORM Art 1211 Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditio ns. Effects of non-uniform solidary liability only the portion due at the time o f the demand is collectible from any of the debtors or by anyone of the creditor s Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 41 of 110 Cases: y Inchausti v Yuli y Lafarge Cement Philippines v Continental Cement EFFE CTS OF SOLIDARY OBLIGATIONS a. SOLIDARY CREDITOR in relation to: i. Common debto r Right to demand y Debtor may pay to any solidary creditor, but if a judicial d emand is made against him, he must pay only to the plaintiff. (Art 1214) Judicia l demand revokes the tacit mutual representation of co-creditors, though not per petually: only until such time the action exists. Payment to creditor who did no t sue is a payment to 3rd person. Same effect granted to extrajudicial demand. D EMAND BY SEVERAL CREDITORS: Pay the one who notified him first. If simultaneous, debtor reserves the right to choose. Does not apply to MIXED SOLIDARITY: solida ry co-debtor may pay in behalf of the one to whom demand has been made AND to an y of the solidary creditors y The creditor may proceed against ANY ONE of the so lidary debtors or SOME or ALL of them simultaneously. (Quiombing v CA) The deman d made against one of them shall not be an obstacle to those which may be subseq uently be directed against others, so long as the debt has not been fully collec ted. (Art 1216) y Payment made by one of the solidary debtors extinguishes the o bligation. If two or more solidary debtors offer to pay, the creditor may choose which to accept. (Art 1217, Par 1) y Each creditor may renounce his right even against the will of the debtor, and the latter need not thereafter pay the oblig ation to the former. In case of novation, compensation, confusion, remission by a creditor y Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors OR with any of the solidary debtors, shall exting uish the obligation, without prejudice to the provisions of Art 1219 i.e. respon sibility of a solidary co-debtor with respect to reimbursement prior to his remi ssion (Art 1215 Par 1) ii. Solidary co-creditor/s In case of novation, compensat ion, confusion, remission y The creditor who may have executed any of these acts , as well as he who collects the debt, shall be liable to others for the share i n the obligation corresponding to them (Art 1215 Par 2) o Remission done by seve ral but not all of the creditors: those who made it do not have action against e ach other, but all of them liable for the share of one who does not remit Prejud icial acts prohibited y Each one of the solidary creditors may do whatever is us eful to the others, but not anything which may be prejudicial to the latter. (Ar t 1212) o E.g. remission, novation, compensation and merger/confusion o Take not e that the same act is permitted by Art 1215, wherefore Tolentino concludes that the provision is unhappily inaccurate . o To harmonize with Art 1215: The preju dicial acts are valid as to the debtor, but not with respect to the co-creditors whose rights subsists and can be enforced against the creditor who performed pr ejudicial acts Assignment of rights not allowed y Solidary creditor cannot assig n his rights without the consent of others (Art 1213) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 42 of 110 o o Why? As a solidary creditor, he is an agent of others, cannot assign that agency without the consent of his principals. Implies mutual confidence may take into account the personal qualification of each creditor. Assignment of rights allowe d as to co-creditor b. SOLIDARY DEBTOR in relation to: i. Common creditor Obligation to perform y Ea ch one of the solidary co-debtor is bound to render entire compliance with the p restations (Art 1207) In case of novation, compensation, confusion, remission by a creditor y Extinguishes the obligation without prejudice to the responsibilit y of a solidary co-debtor with respect to reimbursement prior to his remission ( Art 1215 Par 1) ii. Solidary co-debtor In case of payment by a co-debtor y Payme nt by one of the solidary co-debtors extinguishes the obligation. (Art 1217, Par 1) y Solidary co-debtor who paid may reimburse from his co-debtors only the sha re which corresponds to each, with the interest for the payment already made, bu t if the payment is made before debt is due, no interest for the intervening per iod may be demanded. (Art 1217, Par 3) Converted into a Joint Obligation as to c o-debtors, but no real case of subrogation because the old one is extinguished a nd the new one is created Partial payment: may recover only insofar as the payme nt exceeded his share of the obligation y When one of the solidary debtors is in solvent and cannot reimburse, his share will be borne by all his codebtors in pr oportion to the debt of each. (Art 1217, Par 3) y Payment by co-debtor does not entitle him to reimburse from co-debtors if such payment is made after the oblig ation has prescribed or become illegal. (Art 1218) Also applies to prior total r emission in favor of one debtor y The remission made by the creditor of the shar e which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case debt had been totally paid by an yone of them before remission was effected. (Art 1219) Applies when one of the d ebtors has already paid the obligation in full (in such a case, the obligation a s to the creditor is already extinguished and nothing more to remit even partial ly) Relationship of the creditor with the solidary debtor does not extend to the relationship among solidary co-debtors y The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (Art 1220) In case of fortuitous event y If the thing has b een LOST OR if the prestation has become IMPOSSIBLE without the fault of the sol idary debtors, the obligation shall be extinguished (Art 1221, Par 1) y If there was fault on the part of any one of them, ALL shall be responsible to the credi tor, for the price and payment of damages and interests, without prejudice to th eir action against the guilty or negligent debtor. (Art 1221, Par 2) Guilty cred itor who pays indemnity cannot recover from his co-debtors. Other co-debtors who pay the indemnity can recover the full amount from the guilty co-debtor. y If t hrough a fortuitous event, the thing is LOST or the performance of the prestatio n has become IMPOSSIBLE after one of the solidary debtors has incurred in delay through the judicial or extra-judicial demand upon him by creditor, the provisio ns of the preceding paragraph shall apply. (Art 1221, Par 3) LOST or IMPOSSIBLE without fault / fortuitous event LOST or IMPOSSIBLE with faul t of any one Obligation is extinguished All liable for damages and interest, but co-debtors have right against guilty debtor Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] LOST or I MPOSSIBLE without fault / fortuitous event but after any one incurred in delay Page 43 of 110 All liable for damages and interest, but co-debtors have right ag ainst guilty debtor Cases: y y y y Jaucian v Querol RFC v CA Quiombing v CA Inciong v CA DEFENSES AVAILABLE TO A SOLIDARY DEBTOR AGAINST THE CREDITOR Art 1222 A solidary debtor may, in actions filed by the creditor, avail himself of all defense whic h are of four types: 1. Those derived from the nature of the obligation y Connec ted with the obligation and derived from its nature y Constitutes a total defens e y E.g. non-existence of the obligation because of illicit cause, object or abs olute simulation, nullity due to defect in capacity or consent of all the debtor s (minority, fraud or violence), unenforceability because of lack of proper proo f under the Statute of Fraud, non-performance of suspensive condition or non-arr ival of period affecting the entire obligation, extinguishment of the obligation such as by payment and remission, all other means of defense which may invalida te the original contract y Sir Labitag: Look for these things because it will gi ve you a total defense: i. Vices of consent ii. Cause of action has prescribed i ii. Entire obligation is void iv. Voidable at the instance of all of them , BUT if just one, you can use the defense as well 2. Personal defenses y Total defens e e.g. minority, insanity, fraud, violence, intimidation (sufficient causes to a nnul consent) y Partial defense e.g. special terms or conditions affecting his p art of the obligation 3. Defenses pertaining to his share y Partial defense y E. g. may share is not yet due, so you can only compel me to give the share of the co-debtors 4. Those personally belonging to the other co-debtors avail himself t hereof only as regards that part of the debt for which the latter are responsibl e y Partial defense only for the debtor-defendant y E.g. the co-debtor s share i s not yet due, so you can only compel me to give my share EFFECTS OF THE DEFENSE S 1. If derived from the nature: all the solidary co-debtors are benefited 2. If personal one: only him benefited (exclusively) 3. If personally to the co-debto r: partial defense Cases: y Inchausti v Yulo supra y Alipio v CA JOINT INDIVISIBLE OBLIGATIONS Concept Their tie is joint, but the performance is indivisible. One in which the object of the object or prestation is indivisible, not susceptible of division; while the tie between the parties is joint, that is liable only to a proportion ate share. (Art 1209) Several creditors or debtors but the prestation is indivis ible, obligation is joint unless solidary has been stipulated Midway between joi nt (no creditor can do prejudicial acts to others, no debtor can be made to answ er for the others) and solidarity (fulfillment requires the concurrence of all t he debtors, collective action is expressly required for prejudicial acts) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 44 of 110 Sir Labitag s example: obligation to assemble a jeepney between three different specialist: mechanic, welder, upholsterer or car painter. Indivisibility disting uished from solidarity Art 1210 The indivisibility of an obligation does not nec essarily give rise to solidarity. Nor does solidarity of itself imply indivisibi lity. INDIVISIBILITY Each creditor cannot demand more than his share and each debtor i s not liable for more than his share Indivisibility refers to the prestation tha t is not capable of partial performance Only the debtor guilty of breach of obli gation is liable for damages, thereby terminating the agency Can exist even if t here is only one debtor or only one creditor The other debtors are not liable in case of insolvency of one debtor SOLIDARITY Each creditor may demand the full p restation and each debtor has the duty to comply with the entire prestation Soli darity refers to the legal tie or vinculum defining the extent of liability All of the debtors is liable for the breach of obligation committed by any one of th e debtors Can only exist when there is at least creditor or debtors (requires pl urality of subjects) The other debtors are proportionately liable in case of ins olvency of one debtor Effects of Joint Indivisible Obligation Art 1209 If the division is impossible, the right of the creditors may be prejudiced only by their collective acts 1. Cr editors prejudiced only by their collective acts 2. Co-debtors not liable for th e share of the insolvent debtor 3. Creditor must proceed against all the joint d ebtors, because the compliance of the obligation is possible only if all the joi nt debtors would act together. 4. If one of the debtors cannot comply, the oblig ation is converted into monetary consideration (liability for losses and damages ). One who is ready and willing to comply will pay his proportionate share plus damages when his financial condition improves. 5. Debtor must deliver to all the creditors. If he delivers to only one, liable for non-performance as to other c reditors. Damages are divisible and each creditor can recover separately his pro portionate share. Liability for damages in case of breach Art 1224 A joint indiv isible obligation gives rise to indemnity for damages from the time anyone of th e debtors does not comply with his undertaking. The debtors who may have been re ady to fulfill their promises shall not contribute to the indemnity beyond the c orresponding portion of the price of the thing or of the value of the service wh ich the obligation consists. 1. Gives rise to indemnity for damages, non-complia nce with undertaking 2. Debtors ready to fulfill shall not be liable V. DIVISIBLE AND INDIVISIBLE OBLIGATION thing which is the object thereof performance of the prestation and not to the DIVISIBLE OBLIGATIONS Concept One which is susceptible of partial performance; debtor can legally perf orm the obligation by parts and the creditor cannot demand a single performance of the entire obligation. DIVISIBILITY OF THINGS different from DIVISIBILITY OF OBLIGATIONS o Divisible Thing: When each one of the parts into which it is divid ed forms a homogenous and analogous object to the other parts as well as to the thing itself o Indivisible Thing: When if divided into parts, its value is dimin ished disproportionately Test of Divisibility 1. Will or intention of the partie s 2. Objective or purpose of the stipulated prestation 3. Nature of the thing 4. Provisions of law affecting the prestation Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 45 of 110 Effects of Divisible Obligations 1. Art 1223 The divisibility or indivisibility of the things that are the object of obligations in which there is only one debt or and only one creditor does not alter or modify the provisions of Chapter 2 of this Title (Nature and Effect of Obligations). 2. Art 1233 A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered as the case may be. INDIVISIBLE OBLIGATIONS Concept Whatever may be the nature of the thing which is the object thereof, whe n it cannot be validly performed in parts. Distinguished from Solidary Obligatio ns INDIVISIBILITY Each creditor cannot demand more than his share and each debtor i s not liable for more than his share Indivisibility refers to the prestation tha t is not capable of partial performance Only the debtor guilty of breach of obli gation is liable for damages, thereby terminating the agency Can exist even if t here is only one debtor or only one creditor The other debtors are not liable in case of insolvency of one debtor SOLIDARITY Each creditor may demand the full p restation and each debtor has the duty to comply with the entire prestation Soli darity refers to the legal tie or vinculum defining the extent of liability All of the debtors is liable for the breach of obligation committed by any one of th e debtors Can only exist when there is at least creditor or debtors (requires pl urality of subjects) The other debtors are proportionately liable in case of ins olvency of one debtor Kinds of Indivisible Obligations NATURAL Art 1225 Par 1 For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. 1. Obligat ion to give definite things 2. Not susceptible of partial performance LEGAL Art 1225 Par 3 However, even though the object or service may be physically divisibl e, an obligation is indivisible if so provided by law or intended by parties. CO NVENTIONAL Art 1225 Par 3 However, even though the object or service may be phys ically divisible, an obligation is indivisible if so provided by law or intended by parties. Presumptions in Indivisible Obligations OF INDIVISIBILITY Art 1225 Par 1 For the purposes of the preceding articles, obligations to give definite t hings and those which are not susceptible of partial performance shall be deemed to be indivisible. Presumption of indivisibility also applies in obligations to do OF DIVISIBILITY Art 1225 Par 2 When the obligation has for its object the ex ecution of certain number of days of work, the accomplishment of work by metrica l units or analogous things which by their nature are susceptible of partial per formance, shall be divisible. Divisibility and indivisibility in obligations not to do Art 1225 Par 4 In obligations not to do, divisibility or indivisibility s hall be determined by the character of the prestation in each particular case. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 46 of 110 Effects of Indivisible Obligations 1. Art 1223 The divisibility or indivisibilit y of the things that are the object of obligations in which there is only one de btor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title (Nature and Effect of Obligations). 2. Art 1233 A debt shall not b e understood to have been paid unless the thing or service in which the obligati on consists has been completely delivered or rendered as the case may be. a. EXC EPTIONS: a. Obligation has been substantially performed in good faith (Art 1234) b. When the creditor accepts performance, knowing its completeness, and without protest, the obligation is deemed fully performed (Art 1235) 3. Art 1224 A join t indivisible obligation gives rise to indemnity for damages from the time anyon e of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyon d the corresponding portion of the price of the thing or of the value of the ser vice which the obligation consists. 4. See Joint Indivisible Obligations Cessati on of Indivisibility a) Natural Indivisibility: conversion of the obligation to pay damages b) Conventional/Legal Indivisibility: novation, death of creditor (d ivision among heirs) Entire y y y and Severable Contracts depends upon the consi deration to be paid, not upon its object Not in the syllabus but Sir mentioned i n passing during lecture ENTIRE consideration is entire and single; e.g. Sir Lab itag: yearly subscription to Herald Tribune SEVERABLE consideration is expressly or by implication apportioned; e.g. part to be performed by one party consists in several distinct and separate items, and the price is apportioned to each of them VI. OBLIGATIONS WITH A PENAL CLAUSE Concept An accessory undertaking to assume greater responsibility in case of bre ach. Attached to an obligation to insure performance. Ad terrorem clause General ly a sum of money, but can be any other thing stipulated by the parties, includi ng an act or abstention Double function: (1) provide for liquidated damages and (2) strengthen the coercive force of the obligation by the treat of greater resp onsibility in the event of breach Mere non-performance of the principal obligati on gives rise to damages PENAL CLAUSE constitutes an exception to the general ru les on the recovery of losses and damages. PRINCIPAL OBLIGATION Can stand alone, independent of other obligations ACCESSORY OBLIGATION Attached to the principal in order to complete it or take their plac e in case of breach CONDITIONAL OBLIGATION No obligation before the suspensive c ondition happens, it is the fulfillment of the condition that gives rise to the obligation Principal obligation itself is dependent upon an uncertain event OBLIGATIONS WITH A PENAL CLAUSE There is already an existing obligation (the pri ncipal) from the very beginning Accessory obligation (penalty) is dependent upon nonperformance of the principal obligation OBLIGATIONS WITH A PENAL CLAUSE Only one prestation and it is only when this is not performed that the penal clause is enforceable Impossibility of the principal obligation also extinguishes the p enalty He cannot choose to pay the penalty to relieve himself of the principal o bligation, unless that right is expressly granted to him OBLIGATIONS WITH A PENA L CLAUSE Payment of the penalty in lieu of the principal can be made only ALTERNATIVE OBLIGATION Two or more obligations are due, but fulfillment of one o f them is sufficient Impossibility of one of the obligations, without the fault of the debtor, still leaves the other subsisting The debtor an choose which pres tation to fulfill

FACULTATIVE OBLIGATION Power of the debtor to make substitution is absolute Kari chi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] by expres s stipulation Creditor may demand both prestation as long as such right is grant ed to him (i.e. complementary penalty) OBLIGATIONS WITH A PENAL CLAUSE Page 47 of 110 Creditor can never demand both prestations GUARANTY Contract by virtue of which a person, called the guarantor, binds himse lf to fulfill the obligation of the principal debtor in case the latter should f ail to do so. SIMILARITIES 1. They are both intended to insure the performance of the principa l obligation. 2. They are both accessory and subsidiary obligations. 3. Can be b oth assumed by a third person. To pay the penalty is different from the principa l obligation The object of the obligations of the principal debtor and the guara ntor is the same. Principal obligation and the penalty can be assumed by the Pri ncipal debtor cannot be the guarantor of the same obligation same person. Penalt y is extinguished by the nullity of the principal obligation, Guaranty subsists even when the principal obligation is voidable except when the penal clause is a ssumed by a third person or unenforceable or is a natural one. However, if the p enal clause is assumed by a third person, the same principle will apply as in th e case of a guaranty. Kinds of Penal Clause 1. As to effect SUBSIDIARY only the penalty may be enforce d y Presumed in Art 1227: Cannot demand the fulfillment of the obligation and th e satisfaction of the penalty at the same time COMPLEMENTARY both principal obli gation and penalty may be enforced y Only occurs by express stipulation of the p arties 2. As to source CONVENTIONAL LEGAL by law 3. As to purpose PUNITIVE the r ight to damages, besides the penalty subsists; the question of indemnity for dam age is not resolved, but remains subsisting y Only occurs by express stipulation of the parties y Sir Labitag: value of the penal clause is much more than the v alue of the principal, it s purpose is to bludgeon the debtor into performing th e obligation y The Courts are authorized to reduce the damages if: o They find t hat the breach was not one that is wanton (noodles) or done in callous disregard for the rights of the creditor o Treble damages REPARATORY substitutes the dama ges suffered by creditor; the matter of damages is generally resolved, and it re presents the estimate of the damages that a party might suffer from non-performa nce of the obligation, thereby avoiding the difficulties of proving such damages y Presumption in Art 1226, Par 1: Shall substitute the indemnity for damages an d the payment of interests in case of non-compliance y Sir Labitag: pre-agreed m easure prior to the breach y Cases when damages and interest may be recovered in addition to the penalty 1. There is an express provision to that effect 2. Debt or refuses to pay the penalty 3. Debtor is guilty of fraud in the non-fulfillmen t of the obligation Karichi E. Santos | UP Law B2012 by express stipulation of the parties

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 48 of 110 Demandability of penalty Art 1226 Par 2 The penalty may be enforced only when it is demandable in accordance with the provisions of Code. a. Only when the non-p erformance is due to the fault or fraud of the debtor b. Non-performance gives r ise to the presumption of fault creditor does not need to prove the fault of the debtor. Burden of proof for the excuse on the debtor. (Art 1228) c. When credit or elected fulfillment but the same has become impossible (Art 1227) y HOWEVER, penalty not enforceable when the principal obligation becomes IMPOSSIBLE: y Due to fortuitous event y Because the creditor prevents the debtor from performing t he principal obligation Effects of penal clause 1. Substitute for indemnity for damages and payment of interest (Art 1226) EXCEPTION: Unless there is a stipulat ion to the contrary e.g. becomes a facultative obligation Cases: y Makati Develo pment Corporation v Empire Insurance y Tan v CA y Country Bankers Insurance v CA 2. Not exempt debtor from performance penalty is not a defense for leaving obli gation unfulfilled Art 1227 The debtor cannot exempt himself from the performanc e of the obligation by paying the penalty EXCEPTION: Where this right to substit ute penalty has been expressly reserved for him 3. Creditor cannot demand both p erformance and penalty at the same time Art 1227 Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the sa me time EXCEPTION: Unless this right has been clearly granted him 4. Creditor ca nnot collect other damages in addition to penalty Art 1226 Substitute the indemn ity for damages and the payment of interest in case of non-fulfillment * EXCEPTI ONS: 1. There is an express provision to that effect 2. Debtor refuses to pay th e penalty 3. Debtor is guilty of fraud in the non-fulfillment of the obligation When penalty shall by equitably reduced Art 1229 The judge shall equitably reduc e the penalty when the principal obligation has been partly or irregularly compl ied with by the debtor. Even if there is no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. y Partial quantity or extent of fulfillment y Irregular form of fulfillment y Only applies to pena lties prescribed in contracts and not to collection of the surcharge on taxes th at are due, which is mandatory on the collector Effects of Nullity of Principal Obligation or Penal Clause Art 1230 The nullity of the penal clause does not car ry with it that of the principal obligation. The nullity of the principal obliga tion carries with it that of the penal clause. GENERAL RULES: 1. Nullity of prin cipal obligation Also nullifies the penal clause EXCEPTIONS: Penal clause may su bsist even if the principal obligation cannot be enforced y When the penalty is undertaken by a 3rd person precisely for an obligation which is unenforceable, n atural or voidable assumes a form of guaranty which is valid under Art 2052 Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 49 of 110 y Nullity of principal obligation itself gives rise to liability of debtor for dam ages e.g. vendor knew that the thing was inexistent at the time of the contract, vendor becomes liable for the damages although contract itself is void 2. Nullity of penal clause Does not affect the principal obligation In the case of non-performance, damages shall be determined by the same rules as if no penal ty had been stipulated Penal clause may be void because it is contrary to law, m orals, good customs, public order or public policy Rationale: Penalty is merely an accessory to the principal obligation Chapter IV. Extinguishment of Obligations I. Modes of Extinguishment Art 1231 Obligations are extinguished: A. Payment or performance most natural wa y of extinguishing obligation B. Loss of the thing due or Impossibility of perfo rmance C. Condonation or Remission of the debt D. Confusion or Merger of the rig hts of the creditor and debtor E. Compensation F. Novation G. Other causes of ex tinguishment of obligations - Annulment - Rescission - Fulfillment of resolutory condition - Proscription H. Additional miscellaneous causes from Sir Labitag an d Tolentino - Arrival of resolutory period - Compromise - Mutual dissent (opposi te of mutual agreement) - Death extinguishes obligations which are of a purely p ersonal character, apart from its extinctive effect in some contracts such as pa rtnership and agency - Renunciation by the creditor - Abandonment e.g. Art 662 ( abandonment of interest in a party wall) and abandonment of a vessel under the c ode of commerce - Insolvency does not extinguish obligation unless judicially de clared and a discharge was given him. II. Payment or Performance CONCEPT Fulfillment of the prestation due, a fulfillment that extinguishes the o bligation by the realization of the purposes for which it was constituted. Jurid ical act which is VOLUNTARY, LICIT, and MADE WITH THE INTENT TO EXTINGUISH THE O BLIGATION Requisites of a Valid Payment 1. Person who pays 2. Person to whom pay ment is made 3. Thing to be paid 4. Manner, time and place of payment Kinds of P ayment a. Normal debtor voluntarily performs the prestation stipulated b. Abnorm al when debtor is forced by means of judicial proceeding, either to comply with the prestation or pay indemnity Why do you pay? Bigger consequences if you don t pay, the creditor will file action for collection then the sheriff will levy up on your other properties What are the elements/characteristics of a valid paymen t? 1. Identity what is to be paid, payment should be the very same obligation/pr estation promised to be performed/not performed Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 50 of 110 2. Integrity how payment should be made, it should be complete (not only specifi c thing but all of its accessions and accessories) Can anybody pay? YES, as long as his payment has integrity and identity and the creditor accepts it as a vali d tender of payment 1. Who can pay a. In general (creditor cannot refuse valid tender of payment) 1. Debtor 2. Anyo ne acting on his behalf a. Duly authorized agent or representatives b. Heirs (me ans that debtor is dead, if alive, they would be third persons interested in obl igation) c. Successors in interest and assignees b. Third person who is an INTER ESTED PARTY (creditor cannot refuse valid tender of payment) Meaning of INTEREST ED PARTY interested in the extinguishment of the obligations such as y Co-debtor s y Guarantors y Sureties y Owners of mortgaged property or pledge Art 1302 (3) When even without the knowledge of the debtor, a person interested in the fulfil lment of the obligation pays, without prejudice to the effects of confusion as t o the latter s share. Effects of Payment by 3rd Person Interested 1. Valid payme nt; obligation extinguished 2. Debtor to reimburse fully 3rd person interested 3 . 3rd person subrogated to the rights of the creditor c. Third person who is NOT AN INTERESTED PARTY but WITH CONSENT of debtor Art 1302 (2) When a third person , not interested in the obligations, pays with the express or tacit approval of the creditor. Art 1236 Par 1 The creditor is not bound to accept payment or perf ormance by a third person who has no interest in the fulfillment of the obligati on, unless there is a stipulation to the contrary. Effects of Payment by 3rd Per son Not Interested With Debtor s Consent 1. 3rd person is entitled to full reimb ursement Demand from the debtor what he has paid 2. Legal subrogation (novation) 3rd person is subrogated/steps into the shoes of creditor Payor can exercise al l the rights of the creditor arising from the very obligation itself, whether ag ainst the debtor or third person 3. Creditor may refuse to accept payment d. Thi rd person who is NOT AN INTERESTED PARTY and WITHOUT THE KNOWLEDGE OR AGAINST TH E WILL OF THE DEBTOR Art 1236 Par 1 The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the o bligation, unless there is a stipulation to the contrary. Art 1236 Par 2 Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover on ly insofar as the payment has been beneficial to the debtor. Art 1237 Whoever pa ys on behalf of the debtor without the knowledge or against the will of the latt er, cannot compel the creditor to subrogate him in his rights, such as those ari sing from a mortgage, guaranty or penalty. Effects of Payment by 3rd Person Not Interested Without Knowledge or Against the Will 1. 3rd person can only be reimb ursed insofar as payment has been beneficial to debtor y Burden of proof of paym ent on the 3rd person y Benefit to the creditor need not be proved in the follow ing cases: Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 51 of 110 a. If after the payment, the third person acquires the creditor s right b. If th e creditor ratifies the payment to the third person c. If by the creditor s cond uct, the debtor has been led to believe that the third person had authority to r eceive the payment d. Assignment of credit without notice to debtor (Art 1626) 2 . 3rd person cannot compel creditor to subrogate him in the latter s rights e. T hird person who does NOT INTEND TO BE REIMBURSED DEBTOR MUST GIVE CONSENT Art 12 38 Payment by third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor s consent. But the payment i s in any case valid as to the creditor who has accepted it. Effects of Payment b y 3rd person Interested or not Does not intend to be reimbursed 1. Payment is de emed as a donation/offer of donation 2. Donation must be in proper form (i.e. if above P5K it must be in writing) f. In obligation to give Art 1239 In obligatio n to give, payment made by one who does not have free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisi ons of Art 1427 under Title on Natural Obligations. Art 1427 When a minor 18-21 entered into a contract without the consent of the parent or guardian, voluntari ly pays a sum of money or delivers a fungible thing in fulfillment of an obligat ion, there shall be no right to recover the same from the oblige who has spent o r consumed it in good faith. Effect of Incapacity of the payor 1. No free dispos al and no capacity to alienate Payment is invalid, but without prejudice to natu ral obligations 2. Minor who entered contract without consent of parent/guardian No right to recover fungible thing delivered to the creditor who spent or consu med it in good faith g. In case of active solidarity Art 1214 The debtor may pay any one of the solid ary creditors, but if any demand, judicial or extrajudicial has been made by one of them, payment should be made to him. 2. To whom payment can be made a. In general Art 1240 Payment shall be made to the person in whose favor the ob ligation has been constituted, or his successor in interest, or any person autho rized to receive it. 1. Creditor/person in whose favor obligation was constitute d 2. His successor in interest 3. Any person authorized to receive it Payment to a wrong third party GENERAL RULE: Not valid, obligation is not extinguished, ev en if in good faith of the debtor EXCEPTION: 1. Extinguished if the mistake is i mputable to the fault or negligence of the creditor (PAL v CA) 2. Payment in goo d faith to person in possession of credit (Art 1242) Incapacitated person Art 12 41 Par 1 Payment to a third person incapacitated to administer his property shal l be valid if he has kept the thing delivered or insofar as the payment has been beneficial to him. GENERAL RULE: Payment not valid EXCEPTION - When payment to an incapacitated person is valid: a) If creditor has kept the thing delivered b) Insofar as payment benefited creditor Benefit to the creditor need not be prove d in the following cases: Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 52 of 110 e. If after the payment, the third person acquires the creditor s right f. If th e creditor ratifies the payment to the third person g. If by the creditor s cond uct, the debtor has been led to believe that the third person had authority to r eceive the payment h. Assignment of credit without notice to debtor (Art 1626) b . Third person Art 1241 Par 2 Payment to a third person shall also be valid inso far as it has redounded to the benefit of the creditor. GENERAL RULE: VALID if t hird person proves that it redounded to creditor s benefit; otherwise VOID EXCEP TION; When proof of benefit not required also applicable to INCAPACITATED PERSON S Art 1241 Par 3 Such benefit to the creditor need not be proved in the followin g cases: 1. If after the payment, the third person acquires the creditor s right 2. If the creditor ratifies the payment to the third person 3. If by the credit or s conduct, the debtor has been led to believe that the third person had autho rity to receive the payment 4. Assignment of credit without notice to debtor (Ar t 1626) 5. Payment in good faith to any person in possession of the credit shall release the debtor (Art 1242) EFFECT: Debtor is released Art 1243 Debtor pays c reditor after being judicially ordered to retain debt EFFECT: Payment not valid if the property is attached or garnished c. In case of active solidarity Art 121 4 The debtor may pay any one of the solidary creditors, but if any demand, judic ial or extrajudicial has been made by one of them, payment should be made to him . y If no demand is made, debtor may pay to any of the solidary creditors y If a ny judicial/extrajudicial demand is made by any of the creditors who made the de mand 3. What is to be paid ( identity ) a. In general y The very prestation (thing or service) due b. In obligations to - GIVE a specific thing Art 1244 Par 1 The debtor of a thing cannot compel the c reditor to receive a different one, although the latter may be of the same value as, or more valuable than which is due. 1. Give specific things itself 2. Acces sions and accessories 3. If with loss, improvements, deterioration Apply Art 118 9 - GIVE a generic thing Art 1246 When the obligation consists in the delivery o f an indeterminate or generic thing, whose quality and circumstances have not be en stated, the creditor cannot demand a thing of superior quality. Neither can t he debtor deliver a thing of inferior quality. The purpose of obligation and oth er circumstances shall be taken into consideration. GENERAL RULE: Creditor canno t demand a superior quality; Debtor cannot deliver a thing of inferior quality E XCEPTION: Unless quality and circumstances have been stated, purpose and other c ircumstances of obligation considered. - Pay money Art 1249 The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is the legal tender in the Ph ilippines. The delivery of promissory notes payable to order, or bills of exchan ge or other mercantile documents shall produce effect of payment only when they have been cashed, or when through the fault of the creditor they have been impai red. In the meantime, the action derived from the original obligation shall be h eld in abeyance. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 53 of 110 EXCEPTION; RA 4100, RA 8183: Foreign currency if agreed to by parties Art 1250 I n case of an extraordinary inflation or deflation of the currency stipulated sho uld supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of the payment, unless there is an agreement to t he contrary. RA 529 RA 4100 - DO or NOT TO DO Art 1244 Par 2 In obligations to d o or not to do, an act or forbearance cannot be substituted by another act or fo rbearance against the obligee s will. y Substitution cannot be done against the will of creditor Cases: y y y y y c. Arrieta v NARIC supra Kalalo v Luz St. Paul Fire and Marine Insurance v Macondray Papa v AV Valencia et al PAL v CA Payment of interest Art 1956 No interest shall be due unless it has been express ly stipulated in writing. Art 1253 Interest must be satisfied first before capit al 4. How is payment to be made ( integrity ) a. In general Art 1233 A debt shall not be understood to he thing or service in which the obligation consists has ed or rendered as the case may be. GENERAL RULE: Partial cannot be compelled to give partial payments EXCEPTIONS: o have been paid unless t been completely deliver payment is not allowed 1. Contrary stipulation

Creditor cannot be compelled to receive partial prestations; Debtor Art 1248 Par 1 Unless there is an express stipulation to that effect, the credit or cannot be compelled partially to receive the prestations, in which the obliga tion consists. Neither may the debtor be required to make partial payments. Art 1248 Par 2 However, when the debt is in part liquidated and in part unliquidated , the creditor may demand and the debtor may effect the payment of the former wi thout waiting for the liquidation of the latter. 2. Debt is partly liquidated and partly unliquidated o 3. When there are several subjects/parties are bound under different terms and c onditions 4. Compensation b. Substantial performance in good faith Art 1234 If t he obligation has been substantially performed in good faith, the obligor may re cover as though there had been a strict and complete fulfillment, less damages s uffered by the oblige. y Requisites of Substantial Performance 1. Attempt in goo d faith to perform, without any willful or intentional departure 2. Deviation fr om the obligation must be slight 3. Omission or defect is unimportant and techni cal 4. Must not be so material that intention of the parties is not attained c. Estoppel Art 1235 When oblige accepts the performance, knowing its incompletenes s or irregularity, and without expressing any protest or objection, the obligati on is deemed fully complied with. - Constitutes a waiver of defect in performanc e there must however be an intentional relinquishment of a known right. Waiver w ill not result from mere failure to assert a claim for defective performance whe n the thing or work is received Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 54 of 110 Applies only when he knows the incompleteness or irregularity of the payment, ob ligation is deemed extinguished. Estopped from complaining d. Presumptions in payment of interests and installments INTEREST Art 1176 The r eceipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. Art 1253 If the debt produces interest, payment of the principal shall not be de emed to have been made until the interests have been covered. y If principal amo unt is received without reservation as to interest interest is presumed to have been paid INSTALLMENTS Art 1176 Par 2 The receipt of a later installment of debt, without reservation as to prior installments shall likewise raise the presumption that s uch installments have been paid. y If a latter installment is received without r eservation to prior installments prior installments are presumed to have been pa id 5. When is payment to be made When obligation is due and demandable but debtor may pay before due date if peri od is for the benefit of debtor. If for the benefit of both the debtor and credi tor, debtor may only prior to the due date if creditor consents thereto. a. In g eneral Art 1169 Debtor incurs in delay from the time creditor judicially or extr ajudicially demands fulfillment of the obligation b. See Chapter 2: Delay 6. Where payment is to be made a. In the designated place in the obligation (Art 1251 Par 1) b. If no place is expressly designated Art 1251 Par 2 There being no express stipulation and if th e undertaking is to deliver a determinate thing the payment shall be made wherev er the thing might be at the moment the obligation was constituted. Art 1251 Par 3 In any other case (not to deliver a determinate thing), the place of payment shall be at the domicile of the debtor. Art 1251 Par 4 If the debtor changes his domicile in bad faith, or after he has incurred in delay, the additional expens es shall be borne by him. (Absent such circumstances, it will be borne by the cr editor) 7. Expenses of making payment Art 1247 Unless it is otherwise stipulated, the extra-judicial expenses required by the payment shall be for the account of the debtor with regard to the judici al costs, the Rules of Court shall govern. SPECIAL FORMS OF PAYMENT APPLICATION OF PAYMENTS Art 1252 He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the sa me must be applied. UNLESS the parties so stipulate, or when the Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 55 of 110 application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts that are not yet due. If the debtor accepts from the creditor a receipt in which an application of the pa yment is made, the former cannot complain of the same, UNLESS there is a cause f or invalidating the consent. Concept Designation of the debt which is being paid by a debtor who has SEVERAL OBLIGATIONS OF THE SAME KIND, in favor of one credi tor to whom payment is being made Cases: y Reparations Commissions v Universal D eep Sea Fishing y Paculdo v Regalado Requisites for Application of Payment 1. Sa me debtor 2. Same creditor 3. Various debts are of same kind, generally monetary character o Cannot apply to prestation to give specific thing o Can apply to pr estation to give generic thing 4. All obligations must be due o EXCEPTIONS: Mutu al agreement of parties upon consent of the party in whose favor the term was es tablished 5. Payment is not enough to extinguish all debts 6. Debtor has prefere ntial right to choose the debt which his payment is to be applied o Not absolute ; LIMITATIONS: Cannot make partial payments Cannot apply to unliquidated debts C annot choose a debt whose period is for the benefit of the creditor, and period has not yet arrived Right to apply debts must be exercised at the time when debt is paid Rules in Application of Payment 1. Right to apply must be exercised at the time of the payment (Art 1252) 2. Creditor may undertake application, subjec t to the debtor s approval. Once the latter accepts receipt of application, he c annot complain UNLESS there is a cause for invalidating the contract. (Art 1252) 3. Apply to interest first. BOTH (1) interest stipulated and (2) interest due b ecause of debtor s delay Art 1253 If debt produces interest, payment of the prin cipal shall not be deemed to have been made until the interest are covered. If r ules are inapplicable and application cannot be inferred Art 1254 When payment c annot be applied in accordance with preceding rules, or if application can not b e inferred from other circumstances, the debt which is MOST ONEROUS TO THE DEBTO R among those due, shall be deemed to have been satisfied. If the debts are of t he same nature and burden, the payment shall be applied to all of them proportio nately. Meaning of MOST ONEROUS TO DEBTOR Fundamentally a question of act, which courts must determine on the basis of circumstances of each case eg. o Co-debto r (especially if solidary) vs. sole debtor o Same amount, younger vs. older o Se cured vs. unsecured PAYMENT BY CESSION Art 1255 The debtor may cede or assign his property to his creditors in payment of his debts. This cession, UNLESS there is stipulation to the contrary, shall o nly release the debtor from responsibility for the net proceeds of the thing ass igned. The agreements which on the effect of the cession, are made between the d ebtor and his creditors shall be governed by law. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 56 of 110 Concept Abandonment of the universality of the property of the debtor for the be nefit of his creditors, in order that such property may be applied to the paymen t of his credits. Debtor transfers all the properties not subject to execution i n favor of creditors that the latter may sell them and thus apply the proceeds t o their credits Initiative comes from the debtor but must be accepted by the cre ditors in order to become effective Usually done by debtors in state of insolven cy Requisites for Payment by Cession 1. Plurality of debts 2. Plurality of credi tors 3. Complete or partial insolvency of the debtor 4. Abandonment of all debto r s property not subject to execution 5. Acceptance or consent on the part of th e creditors Effects of Payment by Cession 1. Creditors do not become the owner; they are merely assignees with authority to sell 2. Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the co ntrary not total extinguishment 3. Creditor will collect credits in the order of preference agreed upon, or in default of agreement, in order ordinarily establi shed by law. DATION IN PAYMENT (Dacion en Pago) Art 1245 Dation in payment, whereby property is alienated to the creditor in sat isfaction of a debt in money, shall be governed by law of sales. Concept Deliver y and transmission of ownership of a thing by the debtor and to the creditor as an accepted equivalent of the performance of the obligation. An onerous contract of alienation because object is given in exchange of credit Special form of pay ment because one element of payment is missing: identity Case: y DBP v CA Distin guished from payment by cession DATION IN PAYMENT Transfers the ownership over the thing alienated to the credit or PAYMENT BY CESSION Only the possession and administration (not the ownership) are transferred to the creditors, with an authorization to convert the property into cash with which the debts shall be paid Only extinguishes the credits to t he extent of the amount realized from the properties assigned, unless otherwise agreed upon Involves ALL the property of the debtor There are various, plurality of creditors May totally extinguish the obligation and release the debtor Cession of only som e specific thing Transfer is only in favor of one creditor to satisfy a debt Bot h are substituted performances of obligations Requisites for Dation in Payment 1. Consent of creditor sale presupposes the con sent of both parties 2. Dacion will not prejudice of other creditors 3. Debtor i s not declared judicially insolvent 4. Not a pactum commissorium (a stipulation entitling the creditor to appropriate automatically the thing given as security in case debtor fails to pay) Effects of Dation in Payment 1. Extinguishes paymen t to the extent of the value at the thing to be delivered, either as agreed upon by the parties, or as may be proved, unless the parties by agreement expressly or impliedly or by their silence, consider the thing as equivalent to the obliga tion in which case the obligation is totally extinguished. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 57 of 110 2. If property delivered to the creditor assumption that it is a PLEDGE, as it i nvolves less transmission of rights unless it is clearly the intention of partie s Case: y Filinvest Credit Corporation v Philippine Acetylene TENDER OF PAYMENT AND CONSIGNATION 1. TENDER OF PAYMENT Concept The act of offering the creditor what is due him to gether with a demand that the creditor accept the same When creditor refuses wit hout just cause to accept payment, he is in mora accipiendi and debtor is releas ed from responsibility if he consigns the thing due Manifestation made by debtor to creditor of desire to comply with obligation Preparatory act to consignation ; does not cause extinguishment of obligation unless completed by consignation R equired ONLY when the creditor refuses without just cause to accept payment What are the examples of unjust cause for refusal 1. There was a previous tender of payment, without which the consignation is ineffective 2. Tender of payment was of the very thing due, or in case of money obligations, that the legal tender cu rrency was offered 3. Tender of payment was unconditional 4. Creditor refused to accept payment without just cause What are the examples of just cause for refus al 1. Debt is not yet due and the period is for the benefit of the creditor 2. P ayment by third persons not interested in the fulfillment of the obligation beca use to begin with, tender presupposes capacity of the payor 3. Accrual of intere st will be suspended from the date of such tender if immediately deposited with the court Requisites of a Valid Tender of Payment 1. Made in lawful currency 2. Should include interest due 3. Must be unconditional; but the creditor cannot va ry the terms of a tender accepted by him 4. Unaccepted offer in writing to pay i s equivalent to actual production and tender of money or property 2. CONSIGNATIO N Concept The act of depositing the thing due with the court or judicial authori ties whenever the creditor cannot accept or refuses to accept payment. Generally requires prior tender of payment Made by depositing the things due at the dispo sal of judicial authority (includes sheriff) Purpose Avoid performance of an obl igation becoming more onerous to the debtor by reasons not imputable to him Duty of attending indefinitely to its preservation, without remedy to be relieved fr om the debt Requisites of Consignation 1. There is a debt due 2. The consignatio n of the obligation was made because of some legal cause o Previous valid tender was unjustly refused o Other circumstances making previous tender exempt 3. Pri or notice of consignation had been given to the person interested in the obligat ion (1st notice) 4. Actual deposit/consignation with proper judicial authority 5 . Subsequent notice of consignation (2nd notice) o May be complied with by the s ervice of summons upon the defendant creditor together with a copy of the compla int o Given to all interested in the performance of obligations: passive (co-deb tors, guarantors, sureties) or active (solidary co-creditors, possible litigants ) a. When tender and refusal not required Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 58 of 110 Art 1256 Par 2 Consignation alone shall produce the same effect in the following cases: 1. Creditor is absent or unknown or does not appear at place of payment 2. Incapacitated to receive payment at the time it is due need not be legally de clared 3. Without just case, he refuses to give a receipt 4. Two or more persons claim the same right to collect 5. Title of the obligation has been lost b. Two notice requirement FIRST NOTICE: Art 1257 Par 1 In order that the consignation of the thing due may release the obligor, it must FIRST be announced to the pers ons interested in the fulfillment of the obligation. y Why? SECOND NOTICE: Art 1 258 Par 2 The consignation having been made, the interested parties shall also b e notified thereof. y Why? Effects of non-compliance Art 1257 Par 2 The consigna tion shall be ineffectual if it is not made strictly in consonance with the prov isions which regulate payment. (Soco v Militante) c. Effects of Consignation whe n properly made, charge against the creditor Art 1260 Par 1 Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. 1. The debtor is released in the same manner as if he had performed the obligation at the time of consignatio n, because this produces the effect of a valid payment. 2. The accrual of intere st on the obligation is suspended from the moment of the consignation. 3. The de teriorations or loss of a thing or amount consigned occurring without fault of t he debtor must be borne by the creditor, because the risks of the thing are tran sferred to the creditor from the moment of deposit. 4. Any increment or increase in value of the thing after the consignation inures to the benefit of the credi tor. d. Withdrawal by debtor BEFORE acceptance by creditor OR approval by the Co urt - Before the consignation is effected, the debtor is still the owner and he may withdraw it. (TLG v Flores) Art 1260 Par 2 Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has bee n properly made, the debtor may withdraw the thing or sum deposited allowing the obligation to remain in force. Effects of withdrawal before consignation is fin al 1. Obligation remains in force 2. Debtor bears all the expenses incurred beca use of the consignation e. Withdrawal by debtor AFTER proper consignation Art 12 61 If the consignation having been made, the creditor should authorize the debto r to withdraw the same, he shall lose every preference which he may have over th e thing. The co-debtors, guarantors, and sureties shall be released. With credit or s approval EFFECTS: revival of the obligation and relationship between credit or and debtor is restored to the condition in which it was before the consignati on Without creditor s approval EFFECTS: f. Expenses of consignation Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 59 of 110 Art 1259 The expenses of consignation, when properly made, shall be charged agai nst the creditor. o Consignation is properly made when: After the thing has been deposited in the court, the creditor accepts the consignation without objection and without reservation of his right to contest it because of failure to comply with any of the requisites for consignation When the creditor objects to the co nsignation but the court, after hearing declares that the consignation has been validly made. Cases: y y y y y y y De Guzman v CA TLG International Continental Enterprising v Flores McLaughlin v CA Soco v Militante Sotto v Mijares Meat Packing Corp v Sandiganbayan Pabugais v Sahijwani III. Loss or Impossibility LOSS OF THE THING DUE Concept Not limited to obligations to give but extends to those which are person al, embracing therefore all causes which may render impossible performance of th e prestation. Generally applies to determinate things Must be subsequent to the execution of the contract in order to extinguish the obligation If impossibility already existed when the contract was made, the result is not extinguishment bu t inefficacy of the obligation under Art 1348 (impossible things or services can not be object of contracts) and Art 1493 (Sales; loss object of contract, contra ct without any effect). Art 1189 (2) If the thing is lost through the fault of t he debtor, he shall be obliged to pay damages; it is understood that the thing i s loss when it: a. Perishes b. Goes out of the commerce of man c. Disappears in such a way that its existence is unknown or it cannot be recovered Kinds of Loss a. As to extent TOTAL PARTIAL Requisites of Loss of the Thing Due Art 1262 In o rder to extinguish obligation: 1. Loss or destroyed without the fault of the deb tor 2. Before the debtor incurs in delay 3. After the obligation is constituted Presumption in Loss of the Thing Due Art 1265 Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was DUE TO HIS FAUL T, UNLESS there is proof to the contrary, and without prejudice to the provision s of Art 1165. Burden of explaining the loss of the thing in the possession of t he debtor, rest upon him. Art 1165 Action for specific performance or substitute d performance When not applicable In case of earthquake, flood, storm or other n atural calamity. Effects of Loss of the Thing Due a. In obligation to give a spe cific thing Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 60 of 110 Art 1262 Loss or destruction of determinate thing without fault of debtor AND be fore he incurs in delay EXTINGUISHES OBLIGATION Art 1268 When the debt of a thin g certain and determinate proceeds from a criminal offense, the debtor shall NOT BE EXEMPTED from the payment of its price, whatever may be the cause for the lo ss, UNLESS the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. EXCEPTIONS: 1. Debto r is at fault i.e. in bad faith, negligence, delay 2. Debtor is made liable for fortuitous event by law, contractual stipulation or nature of obligation require s assumption of risk on part of debtor b. In obligation to give a generic thing not extinguished Art 1263 In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. y Genus nunquam p erit or The genus never perishes y Sir Labitag: Fallacy! The genus may be legall y loss! EXCEPTIONS: 1. Delimited generic things: limitation of the generic objec t to a particular existing mass or a particular group of things; become determin ate objects whose loss extinguishes the obligation 2. Generic thing has been seg regated 3. Monetary obligation c. In case of partial loss Art 1264 The courts sh all determine whether, under the circumstances, the partial loss of the object o f the obligation is so important as to extinguish the obligation. y Provided tha t partial loss is not imputable to the fault or negligence of the debtor but to fortuitous events or circumstances y Intention of the parties is the controlling factor in the solution of each case of partial loss y E.g. by Sir: When Tyson b it off Holyfield s ear which did not undermine the latter s boxing prowess hehe d. Action against third persons Art 1269 The obligation having been extinguished by the loss of the thing, the creditor shall have all rights of action which th e debtor may have against third person by reason of the loss. y Refers not only to the rights and actions which the debtor may have against third persons but al so to any indemnity which the debtor may have already received. y E.g. money pai d to the debtor upon expropriation of the property which is the object of obliga tion; insurance received by owner of company with respect to victims of sunk ves sel IMPOSSIBILITY OF PERFORMANCE Concept Art 1266 The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the ob ligor. Refers to SUBSEQUENT IMPOSSIBILITY arises AFTER the obligation has been c onstituted. If existing BEFORE, the obligation constituted is under VOID contrac ts Art 1267 When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Doctrine of unforeseen events, rebus sic stantibus : the part ies stipulate in the light of certain prevailing conditions, and once these cond itions cease to exist, the contract also ceases to exist. Requisites for applica tion of Art 1267 1. Event or change in circumstances could not have been foreseen at the time of the execution of the contract Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] 2. 3. 4. Makes the performance of the contract extremely difficult but not impossible Eve nt must not be due to the act of any of the parties Contract is for a future pre station Page 61 of 110 Kinds of Impossibility 1. As to extent TOTAL PARTIAL significant in Art 1264 (extinguishment due to partial loss subject to the court s determination) 2. As to source LEGAL a. Direct prohibited by law b. Indirect prevented by super vening legal duty such as military service PHYSICAL By reason of its nature, can not be accomplished Requisites of Impossibility Art 1266 1. Obligation used to b e possible at the constitution of obligation 2. Subsequent impossibility 3. With out the fault of the debtor Effects of Impossibility a. In obligations to do Art 1266 releases debtor from obligation if prestations has become legally or physi cally impossible Art 1267 releases debtor if performance has become so difficult to be so manifestly beyond the contemplation of the parties Art 1262 Par 2 (by analogy) Impossibility due to fortuitous events does not extinguish obligation i f: o By law o By stipulation o Nature of the obligation requires assumption of r isk In case of partial performance by the debtor: creditor must pay the part don e so long as he benefits from such partial compliance. If debtor received anythi ng from creditor prior to loss or impossibility: return anything in excess of wh at corresponds to the part already performed when the impossibility supervened. Impossibility vs. Difficulty Manifest disequilibrium in the prestations, such th at one party would be placed at a disadvantage by the unforeseen event. Cases: y Occena v CA y Naga Telephone Co v CA y PNCC v CA b. In case of partial impossib ility Art 1264 The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish th e obligation. IV. Condonation or Remission Concept An act of liberality by virtue of which, without receiving any equivalen t, the creditor renounces the enforcement of obligation, which is extinguished i n its entirety or in that part or aspect of the same to which the remission refe rs. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 62 of 110 It is an essential characteristic of remission that it be gratuitous , that ther e is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes y Dation in payment receive a thing different from that stipulated y Novation object or principal conditions of the obligation sho uld be changed y Compromise when the matter renounced is in litigation or disput e and in exchange of some concession which the creditor receives Kinds of Condon ation 1. As to extent TOTAL PARTIAL refer to the amount of indebtedness, or to a n accessory obligation (such as pledge or interest) or to some other aspect of t he obligation (such as solidarity) 2. As to form Art 1270 Par 1 Condonation or r emission is essentially gratuitous, and requires the acceptance by the obligor. It may be expressly or impliedly. EXPRESS when made formally, accordance with th e forms of ordinary donations IMPLIED inferred from the acts of parties Requisit es of Condonation 1. Debts must be existing and demandable at the time remission is made 2. The renunciation of the debt must be gratuitous or without any equiv alent or consideration 3. Debtor must accept the remission y Unilateral renuncia tion is possible under Art 6 and nothing prevents him from abandoning his rights y Parties must be capacitated and must consent; requires acceptance by the obli gor, implied in mortis causa (effective upon the death of the creditor) and expr ess inter vivos (effective during the lifetime of the creditor) Case: y Yam v CA When formalities required Art 1270 Par 2 One and other kind shall be subject to the rules which govern inofficious donation. EXPRESS condonation, shall further more, comply with the forms of donation. Bilateral acts which requires acceptanc e by the debtor Subject to the rules on donations with respect to acceptance, am ount and revocation Formalities of a donation are required in the case of an exp ress remission Revocable subject to the rule on inofficious donation (excessive, legitime is impaired), ingratitude and condition not followed Presumptions in C ondonation 1. Art 1271 The DELIVERY of a private document evidencing a credit, m ade voluntarily by a creditor to the debtor, IMPLIES the renunciation of the act ion which the former had against the latter. Not applicable to public documents because there is always a copy in the archives which can be used to prove the cr edit. Surrender of weapon of enforcement of his rights 2. Art 1272 Whenever the private document in which the debt appears is found in the POSSESSION of the deb tor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. Only prima facie and may be overcome by contrary evidence t o show that notwithstanding the possession by the debtor of the private document of credit, it has not been paid. 3. Art 1274 It is presumed that the accessory obligations of pledge has been REMITTED when the thing pledged, after its delive ry to the creditor, is found in the possession of the debtor, or a third person who owns the thing. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 63 of 110 Effects of Condonation 1. In general extinguishes either totally or partially 2. In case of joint or solidary obligations affects the share corresponding to the debtor in whose benefit the remission was given Governing Rules in Condonation Art 1270 Rules in inofficious donations Effects of Renunciation of Principal or Accessory Obligation Art 1273 The renunciation of the principal debt shall extin guish the accessory obligations; but the waiver of the latter shall leave the fo rmer in force. Why? Accessory merely follows principal V. Confusion or Merger of Rights Concept Merger or confusion is the meeting in one person of the qualities of the creditor and the debtor with respect to the same obligation. Erases the plurali ty of subjects of the obligation and extinguishes the obligation because it is a bsurd that a person should enforce an obligation against himself. May be revoked , as a result of which the obligation is recreated in the same condition that it had when merger took place CAUSE OF MERGER: Anything that brings about successi on to the credit e.g. debtor inherits credit from the creditor. However, cannot be the other way around because under the present law, heirs do not inherit the debts of their predecessors. Requisites for Confusion 1. Must take place between the creditor and the principal debtor (Art 1276) 2. Very same obligation must b e involved, for if the debtor acquires rights from the creditor, but not particu lar obligation in question, there will be no merger 3. Confusion must be total o r as regards the entire obligation Effects of Confusion 1. In general extinguish the obligation 2. In case of y Joint obligations - Art 1277 Confusion does not extinguish a joint obligation EXCEPT as regards the share corresponding to the c reditor or debtor in whom the two characters concur. y Solidary obligations Art 1215 confusion made by any of the solidary creditors or with any of the solidary debtors shall extinguish the obligation, without prejudice to the provisions of Art 1219. (Solidary co-debtor who has been remitted is still liable to co-debto rs if one of the had paid the obligation in full prior the remission) Confusion in Principal or Accessory Obligation Art 1276 Merger which takes place in the pe rson of the principal debtor or creditor benefits the guarantors. Confusion whic h takes place in the person of any of the latter does not extinguish the obligat ion. Merger releases the guarantor because they are merely accessory obligations Guarantor acquires the credit, his obligation as guarantor is extinguished, but the principal obligation subsists which he can enforce against the debtor and o ther co-guarantors. When mortgaged property belongs to a third person, mortgagee acquires a part of the property, the same is released from the encumbrance. The obligation merely becomes a partly (if the acquisition is not total) unsecured obligation. VI. Compensation Concept It is a mode of extinguishing the obligation to the concurrent amount, t he obligations of those persons who in their own right are reciprocally debtors and creditors of each other. Abbreviated payment Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 64 of 110 Offsetting of two obligations which are reciprocally extinguished if they are of equal value or extinguished to the concurrent amount if of different values. Ba lancing between two obligations, involves a figurative operation of weighing two obligations simultaneously in order to extinguish them to the extent in which t he amount of one is covered by the other. Payment is simplified and assured betw een persons who are indebted to each other. Although it takes place by operation of law, it must be alleged and proved by the debtor who claims its benefits. On ce proved, its effect retroacts to the moment when the requisites provided by la w concur. Distinguished from payments PAYMENT Capacity to dispose of the thing paid and capacity to receive are requir ed for debtor and creditor Performance must be complete COMPENSATION Such capaci ty is not necessary, because it takes place by operation of law and not by the a cts of parties There may be partial extinguishment of an obligation Advantage of Compensation over Payment 1. Simple, taking effect without action b y either party to extinguish their respective obligations 2. More guaranty in ma king the credit effective, because there is less risk of loss by the creditor du e to insolvency or fraud of the creditor Art 1278 Compensation shall take place when two persons, in their own right are creditors and debtors of each other. Di stinguished from Confusion CONFUSION Involves only one obligation There is only one person in whom the char acters of creditor and debtor meet COMPENSATION There must always be two obligat ions Two persons who are mutually debtors and creditors of each other in two sep arate obligations, each arising from a different cause Kinds of Compensation 1. As to extent TOTAL when two obligations are of the same amount PARTIAL when the amounts are not equal 2. As to origin LEGAL takes place by operation of law because all the requisites are present VOLUNTARY/CONVENTIONAL when the parties agree to compensate their mutual obligat ions even if some requisite is lacking, such as that provided in Art 1282 Art 12 79 Requisites of legal compensation is inapplicable Art 1282 The parties may agr ee upon the compensation of debts which are not yet due. y Requisites of Volunta ry Compensation 1. Each of the parties can dispose of the credit he seeks to com pensate 2. They agree to the mutual extinguishment of their credits JUDICIAL whe n decreed by the court in a case where there is a counterclaim e.g. defendant is the creditor of the plaintiff for an unliquidated amount, sets up his credit as a counterclaim against the plaintiff and his credit is liquidated by judgment, thereby compensating it with the credit of the plaintiff. Legal compensation is not possible because the claim is unliquidated Art 1283 If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. FAC ULTATIVE when it can be claimed by one of the parties who, however, has the righ t to object to it, such as when one of the obligations has a period for the bene fit of one party alone and who renounces that period so as to make the obligatio n due y When legal compensation cannot take place for want of some legal requisi tes Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 65 of 110 y As compared with conventional: facultative is unilateral, while conventional dep ends upon agreement of both parties LEGAL COMPENSATION Requisites for Legal Compensation Art 1279 In order that compensation may be pro per it is necessary that: 1. Each one of the obligors be bound principally and that at the same time a pri ncipal creditor of the other y Principals not applicable if only a guarantor y S olidary debtor cannot set up the obligation of the creditor in favor of a co-deb tor, except as regards the share of the latter 2. That both debts consists in a sum of money, or if the things due are consumab le, they be of the same kind and also of the same quality if the latter has been stated 3. That the two debts are due 4. That they be liquidated and demandable Liquidated debts when its existence and amount are determined Demandable - enfor ceable in court What are not subject to compensation o Period which has not yet arrived o Suspensive condition has not yet happened o Obligation cannot be sued upon e.g. natural obligation 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor y Not applicable to facultative obligations, but applicable to those with penal clause y y y Art 1280 Notwithstanding the provisions of the preceding art icle, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. Liability of the guarantor is only subsidiary; it is acce ssory to the principal obligation of the debtor If debtor s obligation is compen sated, it would mean the extinguishment of the guaranteed debt and benefits the guarantor Cases: y y y y y y Gan Tion v CA Silahis Marketing Corp v IAC BPI v Reyes PNB v Sapphire Shipping B PI v CA Mirasol v CA Effects of Legal Compensation 1. Both debts are extinguished to the concurrent a mount (Art 1290) 2. Interests stop accruing on the extinguished obligations or t he part extinguished 3. Period of prescription stops with respect to the obligat ion or part extinguished 4. All accessory obligations of the principal which has been extinguished are also extinguished 5. If a person should have against him several debts which are susceptible of compensation, the rules on application of payments shall apply to the order of the compensation. (Art 1289) When compensa tion is not allowed 1. Depositum (Art 1287) 2. Commodatum (Art 1287) 3. Support due gratuitous title (Art 1287) 4. Civil liability arising from a penal offense (Art 1288) Art 1287 Compensation shall not be proper when one of the debts arise s from a depositum or from the obligations of a depositary or of a bailee in a c ommodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of Art 301 (support in arrears can be compensated). Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 66 of 110 y Why? A deposit is made or a commodatum is given on the basis of confidence of th e owner. It is therefore, just that the depositary or borrower should in fact pe rform his obligation; otherwise the trust of the depositor or lender would be vi olated. Art 1288 Neither shall there be compensation if one of the debts consists in civ il liability arising from a penal offense. y Why? Satisfaction of such obligatio n is imperative No compensation may occur even when all the requisites concur: 1 . When there is renunciation of the effects of compensation by a party rests upo n a potestative right and unilateral declaration of renunciation is sufficient 2 . When the law prohibits compensation a. Art 1287 one of the debts arises from a depositum or from the obligations of a depositary or a bailee in commodatum Cla im for support due by gratuitous title, without prejudice to the provisions of 2 nd Par, Art 3012 b. Art 1288 civil liability arising from a penal offense Compen sation of debts payable in different places Art 1286 Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the p lace of payment. Applies to legal compensation but not to voluntary compensation Effects of Nullity of debts to be compensated Art 1284 When one or both debts a re rescissible or voidable, they may be compensated against each other BEFORE th ey are judicially rescinded or avoided. Effects of Assignment of Credit A. Made AFTER compensation took place: no effect; compensation already perfected, nothin g to assign at all - Assignee is left with an action for eviction or for damages for fraud against assignor B. Made BEFORE compensation took place 1. With conse nt of debtor when he gave his consent cannot set up against assignee UNLESS debt or reserved his right to compensation Art 1285 Par 1 The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the co mpensation which would pertain to him against the assignor, UNLESS the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. 2. With knowledge but without consent of debtor only debts prior to assignment, not subsequent Art 1285 Par 2 If the creditor communicated the cession to him but the debtor di d not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. 3. Without the knowledge of debtor all debts maturing prior to his knowledge Art 1285 Par 3 If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later one s until he had knowledge of the assignment. Rationale: As far as the debtor is concerned, the assignment does not take effec t except from the time he is notified thereof. VII. Novation Concept The extinguishment of an obligation by the substitution or change of the

obligation by a subsequent one which extinguishes or modifies the first either by: 1. Changing the object or principal conditions 2. Substituting the person of the debtor 3. Subrogating a third person in the rights of the creditor Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 67 of 110 Unlike other acts of extinguishing obligation, novation is a juridical act of du al function in that at the time it extinguishes an obligation, it creates a new one in lieu of the old. Does not operate as absolute but only as a relative exti nction. Art 1291 Obligations may be modified by: 1. Changing the object or princ ipal conditions 2. Substituting the person of the debtor 3. Subrogating a third person in the rights of the creditor Kinds of Novation 1. As to form EXPRESS IMP LIED 2. As to origin CONVENTIONAL by express stipulation of the parties LEGAL by operation of law 3. As to object OBJECTIVE/REAL change in the cause, object or principal SUBJECTIVE/PERSONAL modification of obligation by the change of the su bject o passive - substitution of debtor o active - subrogation of a third perso n in the rights of the creditor MIXED both objective and subjective novation 4. As to effect PARTIAL only a modification or change in some principal conditions of the obligation TOTAL obligation is completely extinguished Art 1292 In order that obligation may be extinguished by another which substitutes the same, it is imperative that 1. It be so declared in unequivocal terms (express) 2. Old and the new obligations be on every point incompatible with each other (implied) Nov ation is not presumed Express novation: expressly disclose that their object in making the new contract is to extinguish the old contract Implied novation: no s pecific form is required, all that is needed is incompatibility between original and subsequent contracts Test of incompatibility: If the two contracts can stan d together and each one having independent existence The change must refer to th e object, the cause or the principal conditions of the obligations. Accidental c hanges do not produce novation. Requisites of Novation 1. Previous valid obligat ion 2. The agreement of all parties to the new contract 3. Extinguishment of the old contract 4. Validity of the new one 5. Animus novandi or intent to novate ( especially for implied novation and substitution of debtors) Cases: y y y y y y parties declare that the old obligation is extinguished and substituted by the n ew obligation incompatibility between the old and the new obligations that they cannot stand together Millar v CA Dormitorio v Fernandez Magdalena Estate v Rodriguez Reyes v Secretar y of Justice Congchingyan v RB Surety and Insurance Broadway Centrum Condominium Corp v Tropical Hut Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 68 of 110 y California Bus Line v State Investment Effects of Novation 1. In general extinguishment of the original obligation and creation of a new one 2. When accessory obligation may subsist only insofar as t hey may benefit third person who did not give the consent to the novation y Why? Mortgage, pledge, guaranty was given to any for a particular obligation or for the insolvency of a particular debtor; any change in either of this destroys the basis of the consent of the mortgagor, pledgor, surety or guaranty Effect of th e Status of the Original or the New Obligation 1. Nullity of the original obliga tion new obligation is VOID y One of the requisites of novation is a previous va lid obligation y Also applies to voidable that are already annulled/extinguished Voidability of the original obligation new obligation is VALID if ratified befo re novation new obligation is VALID even if not ratified, but voidable at the in stance of the debtor y Consent of debtor constitutes implied waiver of the actio n for nullity y Defect is not completely cured in expromision wherein debtor has not intervened or consented Art 1298 The novation is void if the original obligation was void, except when a nnulment may be claimed only by the debtor, or when ratification validates acts which are voidable. 2. Nullity of the new obligation original SUBSISTS, UNLESS intends extinguishment of former in any event Voidability of the new obligation new obligation is VALID y BUT if new obligatio n is annulled and set aside, original SUBSISTS Art 1297 If the new obligation is void, the original one shall subsist, unless t he parties intended that the former one shall be extinguished in any event. 3. Suspensive or resolutory condition of original obligation New is pure If inte ntion is merely to suppress the condition, no novation If intention is extinguis h the original obligation itself by the creation of a new obligation, the novati on does not arise except from fulfillment of the condition from original obligat ion. y Where the original obligation is conditional, novation itself must be hel d to be conditional also and its efficacy depends upon whether the condition whi ch affects the former is complied with or not y Suspensive condition of the orig inal not performed, obligation does not come into existence, cause for the new o bligation is wanting y Resolutory condition, same category as void obligation or one which has been extinguished Original obligation is pure New obligation is c onditional y If the intention is merely to attach the condition to the original obligation, there is no novation. y If the new conditional obligation is intende d to substitute the original and pure obligation, novation (and consequent extin guishment of the original) is subject to the condition. y Pending the happening of the condition, the old obligation is enforceable Art 1299 If the original obligation was subject to a suspensive or resolutory co ndition, the new obligation shall be under the same condition, unless it is othe rwise stipulated. OBJECTIVE NOVATION change in the object of prestations Meaning of PRINCIPAL COND ITIONS - principal conditions or terms (e.g. making the debt absolute instead of conditional and vice-versa) Sir Labitag lecture notes - Dacion en pago is an ob jective novation Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 69 of 110 Increase in amount and you can prove that the intention to novate, then it will be an implied novation, but usually, it s not a novation if you change the amoun t. Extension of time does not imply novation. But if the time situation is rever sed (shortening of the period), that is a novation. E.g. Ynchausti v Yulo Conver tion of an obligation to some other obligation e.g. obligation for contract of d eposit for one of loan, or a contract of deposit to one of commodatum. SUBJECTIVE NOVATION In all kinds of subjective novation, the consent of the cred itor is required. 1. By change of debtor CONSENT OF THE THIRD PARTY ALWAYS REQUI RED. Why? Because he assumes the obligation CONSENT OF THE CREDITOR IS LIKEWISE INDISPENSABLE. Why? Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by reason of the inability or insolvency of th e new debtor o Consent may be implied or express as long as it is given. o Howev er, it cannot be presumed from his acceptance of payments by a 3rd party for the benefit of the debtor without further acts; no novation because no consent to t he transfer of the debt itself It is not enough to extend the juridical relation to a 3rd person, it is necessary that the old debtor be released from the oblig ation and the 3rd person or new debtor takes his place. Without the release, the re is no novation, the person who assumed the obligation of the debtor merely be comes a co-debtor or a surety No agreement to solidarity, the first and the new debtor are considered obligated jointly. a. EXPROMISION - May be done at the ins tance of the creditor or the third party himself Requisites of Expromision 1. Co nsent of two parties (new debtor and creditor) 2. Knowledge or consent of the de btor is not required Art 1293 Novation which consists in substituting a new debt or in the place of the original one, may be made even without the knowledge or a gainst the will of the original debtor, but not without the consent of the credi tor. Payment by the new debtor gives him the rights mentioned in Art 1236 and Ar t 1237. Art 1236 Par 2 Whoever pays for another may demand from the debtor what he has p aid, except that if he paid without the knowledge or against the will of the deb tor, he can recover only insofar as the payment has been beneficial to the debto r. Art 1237 Whoever pays on behalf of the debtor without the knowledge or agains t the will of the latter, cannot compel the creditor to subrogate him in his rig hts, such as those arising from a mortgage, guaranty, or penalty. Effects of Expromision 1. The debtor is released from obligation 2. Creditor gen erally cannot recourse from the old debtor if the new debtor is insolvent 3. If substitution is without his knowledge or consent a. Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1294) b. The new debto r can only compel old debtor to reimburse inasmuch as the payment has been benef icial to him No subrogation takes place (Art 1237) 4. If substitution is with kn owledge and consent a. New debtor is entitled to full reimbursement of the amoun t paid and subrogation Art 1294 If the substitution is without the knowledge or against the will of the debtor, the new debtor s insolvency or non-fulfillment o f the obligation shall NOT give rise to any liability on the part of the debtor. b. DELEGACION y Debtor offers and the creditor accepts a third person who conse nts to the substitution so that the consent of the three is necessary y Delegant e (old debtor), delegatario (creditor) and delegado (third person new debtor) Re quisites of Delegacion (vs. Art 1293) Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 70 of 110 1. Initiative for substitution must emanate from the old debtor 2. Consent of th e new debtor 3. Acceptance by the creditor Effects of Delegacion 1. Original deb tor is released from the obligation 2. The new debtor is subrogated in the right s of the creditor. He may demand from the old debtor the entire amount of what h e has paid for the obligation. (Art 1302 Par 2) 3. GENERAL RULE: Old debtor is n ot liable for the insolvency or non-fulfillment of the new debtor (Art 1295) EXC EPTION: i. He is aware of the insolvency at the time he delegated his debt (Art 1295) ii. At the time of the delegation, the new debtor s insolvency is already existing and of public knowledge (Art 1295) Art 1295 The insolvency of the new debtor who has been proposed by the original debtor and accepted by the creditor shall NOT REVIVE the action of the latter ag ainst the original obligor, EXCEPT when said insolvency was already existing and of public knowledge OR known to the debtor when he delegated his debt. Cases: y Garcia v Llamas y Quinto v People 2. By change of creditor: subrogation of a third person in the rights of the creditor Art 1300 Subrogation of a third person in the rights of a creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter mu st be clearly established in order that it may take effect. The transfer of all the rights of the creditor to a third person who substitutes him in all his righ ts. a. CONVENTIONAL SUBROGATION - Takes place by agreement of the parties Requis ites of Conventional Subrogation (Art 1301) 1. Consent of the old creditor becau se his right is extinguished 2. Consent of the debtor old is extinguished and he becomes liable to a new obligation 3. Consent of the third person new creditor becomes a party to the new relation Distinguished from Assignment of Credits CONVENTIONAL SUBROGATION Debtor s consent is necessary Extinguishes the old obli gation and gives rise to a new one The nullity of an old obligation may be cured by subrogation such that the new obligation will be perfectly valid ASSIGNMENT OF CREDITS Debtor s consent not required Refers to the same right which passes f rom one person to another Nullity of an obligation is not remedied by the assign ment of the creditor s right to another Effects of Conventional Subrogation 1. Art 1303 Subrogation transfers to the per son subrogated the credit with all the rights thereto appertaining, either again st the creditor or against third persons, be they guarantors or possessors of mo rtgages, subject to stipulation in a conventional subrogation. o If suspensive c ondition is attached, that condition must be fulfilled first in order the new cr editor may exercise his rights. 2. Art 1304 A creditor, to whom partial payment has been made, may exercise his right for the remainder and he shall be preferre d to the person who has been subrogated in his place in virtue of the partial pa yment of the same credit. Case: y Licaros v Gatmaitan Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 71 of 110 b. LEGAL SUBROGATION - Takes place without agreement but by operation of law bec ause of certain acts - GENERAL RULE: Not presumed, EXCEPTION: Art 1302 - The thi rd person is called legal subrogee Requisites of Legal Subrogation When is Legal Subrogation presumed Art 1302 It is presumed that there is legal subrogation: 1 . When a creditor pays another creditor who is preferred, even without the debto r s knowledge o Refers to hierarchy of credits which will be taught next sem heh e o Debtor can still use any defenses he may have against the original creditor such as compensation 2. When a 3rd person, not interested in the obligation, pay s with the express/tacit approval of the debtor 3. When, even without the knowle dge of the debtor, a person interested in the fulfillment of the obligation pays , without prejudice to the effects of confusion as to the latter s share o Solid ary co-debtor may reimburse to the extent of the debtor s share o Guarantors, mo rtgagors and sureties Effects of Legal Subrogation 1. Art 1303 Subrogation trans fers to the person subrogated the credit with all the rights thereto appertainin g, either against the creditor or against third persons, be they guarantors or p ossessors of mortgages, subject to stipulation in a conventional subrogation. o If suspensive condition is attached, that condition must be fulfilled first in o rder the new creditor may exercise his rights. 2. Art 1304 A creditor, to whom p artial payment has been made, may exercise his right for the remainder and he sh all be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. Case: y Astro Electronics Corp v Philip pine Export and Foreign Loan Guarantee Corporation Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 72 of 110 Title II. CONTRACTS Chapter I. General Provisions A. DEFINITION Art 1305 A contract is a meeting of minds between two persons wher eby one binds himself, with respect to the other, to give something or to render some service. - Sanchez Roman: a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or o thers, or reciprocally, to the fulfillment of a prestation to give, to do or not to do. - Limited to that which produces patrimonial liabilities - Binding effec t of contract based on the following principles o Obligations arising from the c ontract have the force of law between the contracting parties o There must be mu tuality between the parties based on their essential equality, to which is repug nant to have one party bound by the contract leaving the other free therefrom B. ELEMENTS OF A CONTRACT 1. Essential elements (Chapter II, infra) without which there can be no contract a. Consent b. Object c. Cause 2. Natural elements exist as part of the contract even if the parties do not provide for them, because th e law, as suppletory to the contract, creates them. E.g. warranty against hidden defects or eviction in the contract of purchase and sale 3. Accidental elements agreed upon by the parties and which cannot exist without being stipulated e.g. mortgage, guaranty, bond Case: y GSIS v CA C. CHARACTERISTICS OF A CONTRACT 1. Obligatory force constitutes the law as between the parties Art 1308 The contrac ts must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. 2. Mutuality validity and performance cannot be lef t to the will of only one of the parties y Purpose is to render void a contract containing a condition which makes fulfillment dependent exclusively upon the un controlled will of the one of the contracting parties. Art 1308 The contracts mu st bind both contracting parties; its validity or compliance cannot be left to t he will of one of them. Art 1309 The determination of the performance may be lef t to a third person, whose decision shall not be binding until it has been made known to both contracting parties. Art 1310 The determination shall not be oblig atory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. Art 1473 The fixing of the price can neve r be left to the discretion of one of the contracting parties. However, if the p rice fixed by one of the parties is accepted by the other, the sale is perfected . CONTRACT OF ADHESION: A contract in which one party has already prepared a for m of a contract containing stipulations desired by him and he simply asks the ot her party to agree to them if he wants to enter into the contract. 3. Relativity binding only upon the parties and their successors a. Contracts take effect only between the parties, their assignments and heirs Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 73 of 110 Art 1311 Par 1 Contracts take effect only between the parties, assigns and heirs EXCEPT in case where the rights and obligations arising from the contract are n o transmissible by their nature or by stipulation or by provision of law. The he ir is not liable beyond the value of property he received from the decedent. INT RANSMISSIBLE CONTRACTS: a. Purely personal e.g. partnership and agency b. Very n ature of obligation that requires special personal qualifications of the obligor c. Payment of money debts not transmitted to the heirs but to the estate Cases: y Manila Railroad Co v La Compana Transatlantica y DKC Holdings Corp v CA b. No one may contract in the name of another Art 1317 No one may contract in the nam e of another without being authorized by the latter or unless he has by law a ri ght to represent him. y Unenforceable unless ratified expressly or impliedly (Un enforceable Contracts, Art 1302 Par 1) Case: y Gutierrez Hermanos v Orense Two m ore general principles of contracts that were not included in your book/syllabus 4. Consensuality 5. Freedom entering into contracts is a guaranteed right of th e citizens. They are free to do so as long as it s not contrary to law, good mor als, customs, public order and public policy. D. PARTIES IN A CONTRACT 1. Auto-c ontracts o Necessary for the existence of a contract that two distinct persons e nter into it o No general prohibitions, only special prohibitions such as Art 14 91 (Persons who cannot acquire by purchase, even at a public or judicial auction ) o Auto-contracts are generally VALID Existence of a contract is not determined by the number of persons who intervene in it, but by the number of parties. Not by the number of individual wills but by the number of declarations of will. o As long as there are two distinct patrimonies, even if they are represented by t he same person. 2. Freedom to contract Art 1306 The contracting parties may esta blish such stipulations, clauses, terms and conditions as they may deem convenie nt, provided they are not contrary to law, morals, good customs, public order an d public policy. Cases: y Gabriel v Monte de Piedad y Pakistan International Air lines v Ople Special disqualifications: o Art 87, FC inter vivos donation betwee n spouses o Art 1490 husband and wife generally cannot sell property to each oth er, subject to exceptions o Art 1491 special prohibition as to who cannot acquir e by purchase o Art 1782 persons prohibited from giving each other any donation or advantage, cannot enter into universal partnership 3. What they may not stipu late contrary to law, morals, good customs, public order and public policy Art 1 306 o A contract is to be judged by its character, courts will look into the sub stance and not to the mere form of the transaction a. Contrary to law Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 74 of 110 Laws a 1. 2. 3. 4. i. contract must not intervene: Expressly declare their obligatory character Prohib itive Express fundamental principles of justice which cannot be overlooked by th e contracting parties Impose essential requisites without which the contract can not exist Pactum commissorium automatic foreclosure Art 2088 The creditor cannot appropria te the things given by way of pledge or mortgage, or dispose of them. Any stipul ation to the contrary is null and void. Pactum leonina one party bears the lion s share of the risk Art 1799 A stipulation including one or more parties from an y share in the profits or losses is void Pactum de non alienado not to alienate Art 2130 A stipulation forbidding the owner from alienating the immovable mortga ged shall be void ii. iii. b. Contrary to morals y Man s innate sense or notion of what is right and wrong. More or less universal. c. Contrary to good customs y Custom pertains to certai n precepts that cannot be universally recognized as moral, sometimes they only a pply to certain communities or localities y E.g. Liguez v CA d. Contrary to publ ic order y Consideration of the public good, will or weal (welfare), peace and s afety of the public and health of the community e. Contrary to public policy y C ourt must find that the contract contravenes some established interest of the so ciety y E.g. Ferrazzini v Gsel - stipulation not to engage in competitive enterp rise after leaving the employment. Those stipulation must be limited to time, pl ace and extent Cases: y y y y Cui v Arellano Arroyo v Berwin Filipinas Compania de Seguros v Mandanas Bustaman te v Rosel E. CLASSIFICATION OF CONTRACTS 1. According to subject matter a. Things b. Servi ces 2. According to name a. NOMINATE have their own individuality (names) and ar e regulated by special provisions of law, b. INNOMINATE without particular names Art 1307 Innominate contract shall be regulated by the stipulations of the part ies, by the provisions of Titles I and II of this Book, by the rules governing t he most analogous nominate contracts and by customs of the place. Cases: y Dizon v Gaborro i. Do ut des ii. Do ut facias iii. Facio ut facias I give, you give I give, you do I do, you do Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 75 of 110 iv. Facio ut des 3. According to perfection I do, you give a. By MERE CONSENT (consensual) e.g. purchase and sale Art 1315 Contracts are pe rfected by mere consent, and from that moment, the parties are bound not only to fulfillment of what has been expressly stipulated but also to all the consequen ces which, according to their nature, may be in keeping with good faith, usage a nd law. b. By DELIVERY OF THE OBJECT (real) commodatum Art 1316 Real contracts s uch as deposit, pledge and commodatum, are not perfected until the delivery of t he object of obligation. 4. According to its relation to other contracts, degree of dependence a. Preparatory e.g. agency b. Principal e.g. lease or sale c. Acc essory e.g. pledge, mortgage or suretyship 5. According to form a. Common or inf ormal e.g. loan b. Special or formal e.g. donations and mortgages of immovable p roperty 6. According to purpose a. Transfer of ownership e.g. sale or barter b. Conveyance of use e.g. commodatum c. Rendition of services e.g. agency 7. Accord ing to the nature of the vinculum produced, nature of obligation produced a. Uni lateral - e.g. commodatum or gratuitous deposit b. Bilateral or sinalagmatico e. g. purchase and sale c. Reciprocal 8. According to cause a. Onerous b. Gratuitou s or lucrative 9. According to risk a. Commutative b. Aleatory F. STAGES OF CONT RACTS a. Preparation period of negotiation and bargaining, ending at the moment of agreement of the parties b. Perfection moment when the parties come to agree on the terms of the contract c. Consummation or death fulfillment or the perform ance of the terms agreed upon in the contract G. AS DISTINGUISHED FROM A PERFECT ED PROMISE AND AN IMPERFECT PROMISE (policitation) CONTRACT Establishes and determines the obligation arising therefrom PERFECTED P ROMISE Tends only to assure and pave the way for the celebration of a contract i n the future; until the contract is actually made, the rights and obligations ar e not yet determined IMPERFECT PROMISE Mere unaccepted offer H. WITH RESPECT TO THIRD PERSONS 1. Stipulations in favor of third persons (stip ulation pour autrui) acceptance is made prior to revocation may demand its fulfi llment provided the Art 1311 Par 2 If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance t o the obligor before its revocation. A mere incidental Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 76 of 110 interest or benefit of a person is not sufficient. The contracting parties must have clearly and deliberately conferred favor upon third person. y y Test of ben eficial stipulation - A mere incidental interest of a 3rd person is not within t he doctrine; it must be the purpose and intent of the stipulating parties to ben efit the third person Requisites of stipulacion pour autrui a. Stipulation in fa vor of third person is a part, not the whole of the contract b. Favorable stipul ation not conditioned or compensated by any kind of obligation whatever c. Neith er of the contracting parties bear the legal representation or authorization of the third party d. Benefit to the 3rd person was clearly and deliberately confer red to by parties e. Third person communicated his acceptance to the obligor bef ore the latter revokes the same 2. Possession of the object of contract by third persons only for real rights Ar t 1312 In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to he provisions of th e Mortgage Law and the Land Registration laws. 3. Creditors of the contracting p arties Art 1313 Creditors are protected in cases of contracts intended to defrau d them. y Art 1387 - in rescissible contracts, presumption of fraudulent alienat ion when debtor does leave sufficient property to cover his obligations y Credit or may ask for rescission Art 1177 (accion subrogatoria) and Art 1381 (accion pa uliana) 4. Interference by third persons Art 1314 Any third person who induces a nother to violate his contract shall be liable for damages to the other contract ing party. y Liability for damages: third person s liability cannot be more than the party he induced (Daywalt v Recoletos) y Requisites of Interference With Co ntractual Relation by Third Person a. Existence of a valid contract b. Knowledge by a third person of the existence of a contract c. Interference by the third p erson in the contractual relation without legal justification Cases: y Daywalt v La Corporacio de los Padres Agustinos Recoletos y So Ping Bun v CA Chapter II. Essential Requisites of Contracts CONSENT Art 1319 Consent is manifested by the MEETING of the offer and the acceptance up on the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a cou nter-offer. Acceptance made by letter or telegram does not bind the offerer exce pt from the time it came to his knowledge. The contract, in such a case, is PRES UMED to have been entered into in the place where the offer was made. REQUISITES OF CONSENT 1. Plurality of subjects 2. Capacity 3. Intelligent and free will 4. Express or tacit manifestation of will 5. Conformity of the internal will and i ts manifestation 1. Must be MANIFESTED by the concurrence of the offer and acceptance Cases: y Ro senstock v Burke y Malbarosa v CA with respect to object and cause Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 77 of 110 OFFER unilateral proposition which one party makes to the other for the celebration of the contract. It must be: a. Must be certain (Art 1319) y DEFINITE so that upon acceptance an agreement ca n be reached on the whole contract; not definite if object is not determinate y COMPLETE indicating with sufficient clearness the kind of contract intended and definitely stating the essential conditions of the proposed contract, as well as the non-essential ones desired by the offeror y INTENTIONAL should be serious a nd not made for fun or in jest b. What may be fixed by the offeror time, place a nd manner of acceptance Art 1321 The person making the offer may fix the time, p lace and manner of acceptance, all of which must be complied with. y Acceptance not made in the manner provided by the offeror is ineffective. c. When made thro ugh the agent accepted from the time acceptance communicated to the agent Art 13 22 An offer made through an agent is accepted from the time acceptance is commun icated to him. d. Circumstances when offer becomes defective death, civil interdiction, insanit y or insolvency Art 1323 An offer becomes ineffective upon the death, civil inte rdiction, insanity or insolvency of either party before acceptance is conveyed. e. Business advertisements of things for sale not definite offers Art 1325 Unles s it appears otherwise, business advertisements of things for sale are not defin ite offers, but mere invitation to make an offer. f. Advertisement for bidders A rt 1326 Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest of lowest bidder, UNLESS the contrary appears. o Not applicable to judicial sale wherein the highest bid must necessarily be accepted Case: y Jardine Davies v CA ACCEPTANCE an unaccepted offer does not give rise to consent y Contract is perfect when the offeror or counter-offeror learns about the acceptance! a. Must be absolute (Art 1319) b. Kinds of acceptance EXPRESS (A rt 1320) IMPLIED (Art 1320) arise from acts or facts which reveal the intent to accept such as the consumption of things sent to the offeree, or the fact of imm ediately carrying out the contract offered QUALIFIED (Art 1319) not an acceptanc e but constitutes a counter-offer c. If made by letter or telegram Art 1319 Par 2 Acceptance made by letter or telegram does not bind the offerer except from th e time it came to his knowledge. Four theories on when the contract is perfected 1. Manifestation theory counterofferee manifest his acceptance 2. Expedition Th eory sending of the letter, mailing if by letter 3. Reception Theory receipt of the message of acceptance 4. Cognition Theory knowledge of offeror of the accept ance Art 1319 Par 2 except from the time of his knowledge d. Period of acceptanc e Art 1324 When the offerer has allowed the offeree a certain period to accept y Offeree may accept any time until such period expires. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 78 of 110 y y y y y Acceptance beyond the time fixed is not legally an acceptance but constitutes a new offer. Acceptance not made in the manner provided by the offeror is ineffect ive. If offeror has not fixed the period, the offeree must accept immediately wi thin a reasonable tacit period. Offer implies an obligation on the part of the o fferor to maintain it for such a length of time as to permit the offeree to deci de whether to accept it or not. Extinguishment or annulment of offer o Withdrawa l by the offeror o Lapse of the time for option period o Legally incapacitated t o act o Offeree makes counter-offer o Contract becomes illegal Case: y Sanchez v Rigos e. Contract of option Art 1324 the offer may be withdraw n at any time before acceptance by communicating such withdrawal, EXCEPT when th e option is founded upon a consideration, as something paid or promised. y Prepa ratory contract in which one party grants to the other, for a fixed period and u nder specified conditions, the power to decide whether or not to enter into a pr incipal contract y Must be supported by an independent consideration and the gra nt must be exclusive y If the option is not supported by an independent consider ation, offeror can withdraw the privilege at any time by communicating the withd rawal to the other party, even if the option had already been accepted. Case: y Adelfa Properties v CA 2. Necessary LEGAL CAPACITIES of the parties Who cannot g ive consent Art 1327 The following cannot give consent to a contract: 1. Unemanc ipated minors 2. Insane or demented persons 3. Deaf-mutes who do not know how to write When offer and/or acceptance is made During a lucid interval VALID In a s tate of drunkenness VOIDABLE utter want of understanding During a hypnotic spell VOIDABLE utter want of understanding 3. The consent must be INTELLIGENT, FREE, SPONTANEOUS and REAL Art 1330 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is VOIDABLE. y Mistake and vi olence spontaneous and intelligence Effect of Defects of Will: Contract is VOIDA BLE (Art 1330) VICES OF CONSENT a. Mistake or Error a wrong or false notion about such matter, a belief in the e xistence of some circumstance, fact or event which in reality does not exist. Ar t 1331 In order that MISTAKE may invalidate consent, it should refer to the subs tance of the thing which is the object of the contract, or to those conditions w hich have principally moved one or both parties to enter into the contract. Mist ake as to the identity or qualifications of one of the parties will vitiate cons ent only when such identity or qualifications have been the principal cause of t he contract. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 79 of 110 A simple mistake of account shall give rise to its correction. KINDS OF MISTAKE 1. Mistake of fact - generally not a ground for annulment of contracts y Ground of mistake based on error is limited to cases in which it may reasonably be said that without such error the consent would not have been given y Effect of mista ke is determined by whether the parties would still have entered into the contra ct despite knowledge of true fact influence upon party a. As to substance of object Invalidates consent if refers to the substance of t he thing But if mistake in lot number for instance, remedy is only reformation o f the contract Invalidates consent For identity/error as to person - generally n ot, except when the qualification is the principal cause of the contract especia lly in gratuitous contracts For qualifications Invalidates consent Solvency of t he party not a cause of nullity Error of account is a mistake in computation mak e proper correction Error as to quantity may vitiate a contract if the primary c onsideration is the quantity e.g. parcel of land was actually only 10 ha and not 30 ha b. As to principal conditions (essential or substantial in character) c. As to i dentity or qualifications of one of the parties d. As to quantity, as distinguished from simple mistake of account Mistakes that do not affect the validity of the contract a. Error with respect t o accidental qualities of the object of the contract b. Error in the value of th ing c. Error which refers not to conditions of the thing, but to accessory matte rs in the contract, foreign to the determination of the objects Cases: y Asiain v Jalandoni y Theis v CA y Heirs of William Sevilla v Leopoldo Sevilla 2. Error of law mistake as to the existence of a legal provision or as to its interpretat ion or application GENERAL RULE: Ignorantia legis neminem excusat Art 3 Ignorance of the law excuse s no one from compliance therewith. EXCEPTION: Mutual error of law Art 1334 Mutu al error as to the legal effect of an agreement when the real purpose of the par ties is frustrated, may vitiate consent. y Requisites for mutual error of law a. Error must be as to the legal effect of an agreement includes rights and obliga tions of the parties, not as stipulated in the contract but as provided by alw b . Must be mutual c. Real purpose of the parties is frustrated When one of the pa rties is unable to read and fraud is alleged burden of proof on party enforcing the contract Art 1332 When one of the parties is unable to read, or if the contr act is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. Cases: y Dumasug v Modelo y Hemedes v CA y Katipunan v Katipunan Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 80 of 110 Inexcusable mistake knew the doubt, contingency or risk Art 1333 There is no mis take if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. y Party cannot alleged error which refers to a fact know n to him or which he should have known by ordinary diligent examination of the f acts y Courts consider not only the objective aspect of the case but also the su bjective e.g. intellectual capacity of the person who made the mistake y E.g. Ca used by manifest negligence b. Violence and Intimidation Art 1335 There is VIOLENCE when in order to wrest consent, serious or irresistib le force is employed. There is INTIMIDATION when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evi l upon his person or property, or upon the person or property of his spouse, des cendants or ascendants, to give his consent. To determine the degree of intimida tion, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or lega l, does NOT vitiate consent. DURESS: degree of constraint or danger either actua lly inflicted (violence) or threatened and impending (intimidation) sufficient t o overcome the mind and will of a person of ordinary firmness Seriousness of the evil or wrong measured both objectively (degree of harm that the evil in itself is likely to produce) and subjectively (determining the effect of the threat up on the mind of the victim in view of his personal circumstances and his relation to the author of the intimidation) VIOLENCE y Physical force or compulsion y Ex ternal and generally serve to prevent an act from being done y Requisites of Vio lence 1. Physical force employed must be irresistible or of such a degree that t he victim has no other course, under the circumstances, but to submit 2. That su ch force is the determining cause in giving the consent to the contract INTIMIDA TION y Moral force or compulsion y Internal operating upon the will and induces the performance of an act y Influences the mind to choose between two evils, bet ween the contract and the imminent injury y Requisites of Intimidation 1. Intimi dation must be the determining cause of the contract, or must have caused the co nsent to be given 2. That the threatened act be unjust or unlawful 3. That the t hreat be real and serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the contra ct as the lesser evil 4. That it produces a reasonable and well-grounded fear fr om the fact that the person from whom it come has the necessary means or ability to inflict the threatened injury Person not limited to life and physical integr ity but also includes liberty ad honor, covers all injuries which are not patrim onial in nature Reasonable fear fear occasioned by the threat must be reasonable and well-grounded; it must be commensurate with the threat Effect of Violence a nd Intimidation Art 1336 Violence or intimidation shall ANNUL the obligation, al though it may have been employed by a third person who did not take part in the contract. Case: y Martinez v HSBC Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 81 of 110 c. Undue Influence any means employed upon a party which, under the circumstances, he could not wel l resist, and which controlled his volition and induced him to give his consent to the contract which otherwise he would not have entered into. Art 1337 There is UNDUE INFLUENCE when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, famil y, spiritual and other relations between the parties, or the fact that the perso n alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. In some measure destroy the free agency o f a party and interfere with the exercise of that independent discretion which i s necessary for determining the advantages and disadvantages of a contract. Dist inguished from intimidation UNDUE INFLUENCE There need not be an unjust or unlawful act INTIMIDATION Unlawfu l or unjust act which is threatened and which causes consent to be given Moral c oercion By analogy, undue influence by a third person may also vitiate consent (Art 1336 ) d. Fraud or Dolo every kind of deception whether in the form of insidious machination, manipulati ons concealments, misrepresentation, for the purpose of leading a party into err or and thus execute a particular act. Must have a determining influence on the c onsent of the victim Compared with error ERROR Vitiate the consent only when it refers to the matters mentioned in Art 13 31 FRAUD Mistake induced by fraud will always vitiate consent when fraud has a d ecisive influence on such consent Requisites of Fraud 1. Must have been employed by one contracting party upon the other (Art 1342 and Art 1344) y If both party, they cannot have action against each other, fraud is compensated 2. Induced the other party to enter into a cont ract (Art 1338) 3. Must have been serious (Art 1344) 4. Must have resulted in da mage or injury to the party seeking annulment Art 1338 There is FRAUD when, thro ugh insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agre ed to. Insidious words and machinations constituting deceit includes false promi ses, exaggeration of hopes or benefits, abuse of confidence, fictitious names, q ualifications or authority, all the thousand and one forms of deception which ma y influence the consent of a contracting party, without necessarily constituting estafa or some offense under the penal laws. Cases: y Hill v Veloso y Woodhouse v Halili supra y Geraldez v CA supra Kinds of Fraud 1. Dolo causante determines or is the essential cause of the consent; ground for annulment of contract Art 1338 without them, he would not have agreed to. 2. Dolo incidente does not have such a decisive influence and by itself cannot cause the giving of consent, but only refers to some particular or accident of the obligation; only gives rise to action for damages Art 1344 Par 2 Incidental fraud only obliges the person employing it to pay dama ges. Failure to disclose facts; duty to reveal them FRAUD

Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 82 of 110 Art 1339 Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes FRAUD. GENERAL RUL E: Silence or concealment does not constitute a fraud EXCEPTIONS: 1. There is a special duty to disclose certain facts 2. According to good faith and usages of commerce the communication should have been made Cases: y Tuason v Marquez y Rur al Bank of Sta. Maria v CA Usual exaggeration in trade; opportunity to know the facts NOT FRAUD Art 1340 The usual exaggerations in trade, when the other party had an opportunity to know the facts, are NOT in themselves fraudulent Aka toler ated fraud or lawful misrepresentation (dolus bonus) as long as they do not go t o the extent of malice or bad faith such as changing the appearance of the thing by false devices and of preventing all verification or discovery of truth by th e other party Caveat emptor! Do not give rise action for damages because of thei r insignificance OR because the stupidity of the victim is the real cause of his loss. import of opportunity to know facts Cases: y Azarraga v Gay y Trinidad v IAC Mere expression of an opinion NOT FRAUD, unless made by an expert and relied upon by the plaintiff Art 1341 A mere expression of an opinion DOES NOT signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. Effects of Fraud 1. Nullity of the contract 2. Indemnification for damages Art 1 344 In order that fraud may make a contract voidable, it should be serious and s hould not have been employed by BOTH contracting parties. Incidental fraud only obliges the person employing it to pay damages. Case: y Songco v Sellner e. Misrepresentation 1. By a third person Art 1342 Misrepresentation by a third person does NOT vitia te consent, unless such misrepresentation has created substantial mistake and th e same is mutual. GENERAL RULE: Fraud by third person does not vitiate the contr act EXCEPTIONS: a. If 3rd person is in collusion with one of the parties, he is considered an accomplice to the fraud and contract becomes VOIDABLE b. If 3rd pe rson not in connivance with any of the parties but leads them both into error (m utual error), the consent is vitiated, contract is VOIDABLE. VIOLENCE AND INTIMI DATION BY 3RD PERSON: annuls the contract FRAUD BY 3RD PERSON: does not annul un less it produces substantial mistake on the part of both parties JUSTIFICATION F OR THE DIFFERENCE: y Party has nothing to do with fraud by a third person and ca nnot be blamed for it y Intimidation can be more easily resisted than fraud 2. M ade in good faith not fraudulent but may constitute error Art 1343 Misrepresenta tion made in good faith is not fraudulent but may constitute error. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 83 of 110 3. Active/passive o Applicable to legal capacity especially age Cases: y Mercado v Mercado y Braganza v Villa Abrille f. Simulation of Contracts declaration of a fictitious will, deliberately made by a greement of the parties in order to produce, for the purposes of deception the a ppearance of a juridical act which does not exist or is different from that whic h was really executed. Kinds of Simulated Contracts Art 1345 Simulation of a contract may be ABSOLUTE o r RELATIVE. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. Effects of simu lation of contracts Art 1346 An absolutely simulated or fictitious contract is v oid. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. ABSOLUTE (simulados) Color of contract, without any substance thereof, the parti es not having intention to be bound VOID - Does not legally exist. Illusory, mer e phantom, injuring 3rd persons, generally fraudulent RELATIVE (disimulados) Par ties have an agreement which they conceal under the guise of another contract VA LID except when it prejudices 3rd persons or has an illicit purpose 1. Ostensibl e acts apparent or fictitious; contract that the parties pretend to have execute d 2. Hidden act real; true agreement between the parties Recovery under simulated contract in absolute simulation 1. If does not have ill icit purpose prove simulation to recover what may have been given 2. If simulate d has illegal object IN PARI DELICTO rules apply Cases: y Rodriguez v Rodriguez y Suntay v CA y Blanco v Quasha OBJECT OF CONTRACTS Thing, right or service which is the subject-matter of the obligation arising fr om the contract Object of the contract and object of the obligation created ther eby are identical What may be the Object of Contracts Art 1347 All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object o f contracts. No contract may be entered into upon future inheritance except in c ases expressly authorized by law. All services which are not contrary to law, mo rals, good customs, public order or public policy may likewise be the object of a contract. 1. All things not outside the commerce of man y Including future thi ngs do not belong to the obligor at the time the contract is made; they may be m ade, raised or acquired by the obligor after the perfection of the contract o Co nditional subject to the coming into existence of the thing o Aleatory one of th e parties bears the risk of the thing never coming into existence Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 84 of 110 Outside the commerce of man all kinds of things and interests whose alienation o r free exchange is restricted by law or stipulation, which parties cannot modify at will o Services which imply an absolute submission by those who render them, sacrificing their liberty, independence or own beliefs or disregarding in any m anner the equality and dignity of persons e.g. perpetual servitude or slavery o Personal rights e.g. patria postestas, marital authority, status, capacity of pe rsons, honorary titles o Public offices, inherent attributes of the public autho rity, political rights of individuals e.g. right of suffrage o Property while th ey pertain to the public dominion o Sacred things e.g. air and sea 2. All rights not intransmissible 3. All services not contrary to law, morals, good customs, public order or public policy y Requisite of Object of Contracts 1. Within the c ommerce of man (Art 1347) 2. Licit, not contrary to law, morals, good customs, p ublic policy or public order (Art 1347) 3. Possible (Art 1348) 4. Determinate as to its kind Art 1349 The object of every contract must be determinate as to its kind. The fa ct that the quantity is not determinate shall not be an obstacle to the existenc e of the contract, provided it is possible to determine the same, without the ne ed of a new contract between the parties. What may NOT be the Objects of Contracts 1. Contrary to law, morals, good custom s, public policy or public order 2. Indeterminable as to their kind 3. Outside t he commerce of man 4. Intransmissible rights 5. Future inheritance, except when authorized by law Art 1347 Par 2 No contract may be entered into upon future inheritance except in cases expressly authorized by law. y The succession must not have been opened at the time of the contract y Excepti on to future things Cases: y Blas v Santos y Tanedo v CA 6. Impossible things or services Art 1348 Impossible things or services cannot be the object of contracts. y y y E.g. of impossible things: o Not susceptible of existing o Outside the commerce of man o Beyond the ordinary strength of power of man Liability for damages o De btor knew of impossibility liable for damages o Debtor is ignorant of impossibil ity and ignorance is justifiable no liability for damages o Both parties have kn owledge of impossibility no liability for damages Impossibility must be actual a nd contemporaneous with the making of the contract and not subsequent o ABSOLUTE or objective: nobody can perform it o RELATIVE or subjective: due to the specia l conditions or qualification of the debtor it cannot be performed TEMPORARY doe s not nullify the contract PERMANENT nullifies the contract CAUSE OF CONTRACTS Meaning of CAUSE Why of a contract; the immediate and most proximate purpose of the contract, the essential reason which impels the contracting parties to enter into it and which explains and justifies the creation of the obligation through such contract Essential reason that moves the parties to enter into a contract Requisites of Cause 1. Exist 2. True Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 85 of 110 3. Licit As distinguished from object o Object is the starting point of agreemen t, without which the negotiations or bargaining between the parties would never have begun o Object may be the same for both of the parties o Cause is different with respect to each party As distinguished from consideration CONSIDERATION < CAUSE CONSIDERATION Reason or motive or inducement by which a man is moved into bind h imself by agreement Requires a legal detriment to the promisee more than a moral duety CAUSE Why of contracts; essential reason that compels contracting parties to celebrate the contract Never rejects any cause as insufficient; need not be material at all and may consist in moral satisfaction for the promissory Art 1350 In onerous contracts the cause is understood to be, for each contractin g party, the prestation or promise of a thing or service by the other; in remune ratory ones, the service or benefit which is remunerated; and in contracts of pu re beneficence, the mere liberality of the benefactor. a. Onerous Contracts y Prestation or promise of a thing or service by the other y Need not be adequate or an exact equivalent in point of actual value especiall y in dealing with objects which have rapidly fluctuating price b. Remuneratory C ontracts y One where a party gives something to another because of some service or benefit given or rendered by the latter to the former where such service or b enefit was not due as a legal obligation y E.g. bonuses c. Contracts of pure ben eficence (Gratuitous) y Essentially agreements to give donations As distinguishe d from motive Art 1351 The particular motives of the parties in entering into a contract are d ifferent from the cause thereof. CAUSE Objective, intrinsic and juridical reason for the existence of the contract itself Essential reason for the contract MOTI VE Psychological, individual or personal purpose of a party to the contract Part icular reason for a contracting party, which does not affect the other and which does not impede the existence of a true distinct cause Person s reason for want ing to get such objective Differs with each person Objective of a party in entering into the contract Always the same for both part ies GENERAL RULE: Motive does not affect the validity of the contract. EXCEPTIONS: 1 . When the motive of a debtor in alienating property is to defraud his creditors , alienation is rescissible 2. When the motive of a person in giving his consent is to avoid a threatened injury, in case of intimidation the contract is voidab le. 3. When the motive of a person induced him to act on the basis of fraud or m isrepresentation by the other party, the contract is likewise voidable. Defectiv e causes and their effects a. Absence of cause and unlawful cause produces no ef fect whatever Art 1352 Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. y E.g. simulated contracts Case: Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 86 of 110 y Liguez v CA b. Statement of a false cause in the contract VOID if there is no other true and lawful cause Art 1353 The statement of a false cause in contracts shall render them VOID, if it should not be proved that they were founded upon another cause which is true and lawful. c. Lesion or inadequacy of cause VALID unless fraud, m istake or undue influence is present Art 1355 Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, UNLESS there has been fraud, mistake or undue influence. y Gross inadequacy suggest fraud and is evidence thereof Cases: y Carantes v CA y Sps Buenaventura v CA Presumption of the existence and lawfulness of a cause, though it is not stated in the contract Art 1354 Although the cause is not stated in the contract, it is presumed that it exists and is l awful, unless the debtor proves the contrary. Chapter III. Form of Contracts A. GENERAL RULE: Contracts shall be obligatory, in whatever form they may have b een entered into, provided all essential requisites for their validity are prese nt. ( Spiritual system of the Spanish Code) Art 1356 Contracts shall be obligatory, in whatever form they may have been ente red into, provided all the essential requisites for their validity are present. B. EXCEPTION: When the law requires that a contract be in some form in order tha t it may be VALID or ENFORCEABLE (Anglo-American principle in Statutes of Fraud) indispensable and absolute; parties Art 1356 However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. Cases: y Hernaez v De los Angeles C. KINDS OF FORMALITIES REQUIRED BY LAW 1. Ad esentia, ad solemnitatem Those required for the validity of contracts, such as t hose referred to in (Sir refers to these as formal contracts) Donation of movable Art 748 Art 749 Do nation of immovable Art 1874 Sale of piece of land through an agent Art 2134 Con tract of antichresis; amount of principal and of the interst Art 1771 Partnershi p; immovable property or real rights are contributed Art 1773 Partnership; inven tory of immovable property contributed Art 1956 Interest for using someone else s money Chattel mortgage Art 2140 2. Those required, not for the validity, but to make the contract effective as a gainst third persons, such as those covered by Art 1357 (if law requires a speci al form, parties may compel each other to observe that form upon perfection of t he contract) and Art 1358 (documents which must appear in a public document; it also constitutes constructive delivery) (1) Acts and contracts which have for their object the creation, transmission, m odification or extinguishment of real rights over immovable property; sales of r eal property or of an interest therein a governed by Articles 1403, No. 2, and 1 405; Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 87 of 110 (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actio ns or rights proceeding from an act appearing in a public document. All other co ntracts where the amount involved exceeds five hundred pesos must appear in writ ing, even a private one. But sales of goods, chattels or things in action are go verned by Articles, 1403, No. 2 and 1405. 3. Ad probationem Those required for the purpose of proving the existence of the contract, such as those under the Statute of Frauds in Art 1403 Chapter IV. Reformation of Instruments Art 1359 When, there having been a meeting of the minds of the parties to a cont ract, their true intention is not expressed in the instrument purporting to embo dy the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, o r accident has prevented a meeting of the minds of the parties, the proper remed y is not reformation of the instrument but annulment of the contract. Reason for Reformation of Instruments Equity dictates the reformation of instrument in ord er that the true intention of the contracting parties may be expressed. Unjust a nd inequitable to allow the enforcement of a written instrument which does not r eflect or disclose the real meeting of the minds of the parties Court do not att empt to make a new contract for the parties, but only to make the instrument exp ress their real agreement Statute of Frauds is no impediment to the reformation of an instrument Distinguished from Annulment REFORMATION Action presupposes a valid existing contract between the parties and only the document or instrument which was drawn up and signed by them does not correctly express the terms of agreement Gives life to the contract upon certain corrections ANNULMENT No meeting of the minds or the consent of either one was vitiated by mistake or fraud Involves a complete nullification of contracts Requisites for Reformation of Instruments 1. Meeting of the minds upon the contr act 2. The true intention of the parties is not expressed in the instrument 3. T he failure of the instrument to express the true agreement is due to mistake, fr aud, inequitable conduct or accident Cases: y Garcia v Bisaya y Bentir v Leande Causes for Reformation 1. Mutual instrument includes something which should not be there or omit what should be there a. Mutual b. Mistake of fact c. Clear and convincing proof d. Causes failure of instrument to express true intention 2. Un ilateral a. One party was mistaken b. Other either acted fraudulently or inequit ably or knew but concealed c. Party in good faith may ask for reformation 3. Mis take by 3rd persons due to ignorance, lack of skill, negligence, bad faith of dr after, clerk or typist 4. Others specified by law to avoid frustration of true i ntent Example of cases where reformation is allowed Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 88 of 110 1. Art 1361 When a mutual mistake of the parties causes the failure of the instr ument to disclose their real agreement, said instrument may be reformed. 2. Art 1363 When one party was mistaken and the other knew or believed that the instrum ent did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. 3. Art 1364 When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrumen t or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. Cases wher e no reformation is allowed 1. Oral contracts there s nothing to reform at all! 2. Art 1366 There shall be no reformation in the following cases: (1) Simple don ations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void. Implied ratification Art 1367 When one of the parties has br ought an action to enforce the instrument, he cannot subsequently ask for its re formation. y There has been election between two inconsistent remedies, one in a ffirmance, the other in disaffirmance Who may ask for reformation MUTUAL MISTAKE : either party or successor in interest MISTAKE BY ONE: injured party, heirs or assigns 1. Art 1368 Reformation may be ordered at the instance of either party o r his successors in interest, if the mistake was mutual; otherwise, upon petitio n of the injured party, or his heirs and assigns. 2. Art 1362 If one party was m istaken and the other acted fraudulently or inequitably in such a way that the i nstrument does not show their true intention, the former may ask for the reforma tion of the instrument. Procedure of reformation Art 1369 The procedure for the reformation of instrument shall be governed by ROC to be promulgated by the Supr eme Court. Cases: y Atilano v Atilano y Carantes v CA supra y Sarming v Dy Chapter V. Interpretation of Contracts (Compare with Rules on Statutory Construction) Primacy of intention Verba intent ione non e contradebent inservare - words ought to be subservient to the intent, not the intent to the word Look for the contractual intent Art 1370 If the term s of a contract are clear and leave no doubt upon the intention of the contracti ng parties, the literal meaning of its stipulations shall control. Art 1372 Howe ver general the terms of a contract may be, they shall not be understood to comp rehend things that are distinct and cases that are different from those upon whi ch the parties intended to agree. y Generalia verba sunt generaliter intelligenc ia general things are to understood in a general sense Cases: y Borromea v CA y Kasilag v Rodriguez How to determine intention Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 89 of 110 Art 1371 In order to judge the intention of the contracting parties, their conte mporaneous and subsequent acts shall be principally considered. Also take note o f the usage and customs of the place How to interpret a contract 1. When it cont ains stipulations that admit of several meanings Art 1373 If some stipulation of any contract should admit of several meanings, it shall be understood as bearin g that import which is most adequate to render it effectual. 2. When it contains various stipulations, some of which are doubtful Art 1374 The various stipulati ons of a contract shall be interpreted together, attributing to the doubtful one s that sense which may result from all of them taken jointly. 3. When it contain s words that have different significations Art 1375 Words which may have differe nt significations shall be understood in that which is most in keeping with the nature and object of the contract. 4. When it contains ambiguities and omission of stipulations Art 1376 The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omis sion of stipulations which are ordinarily established. 5. With respect to the pa rty who caused the obscurity Art 1377 The interpretation of obscure words or sti pulations in a contract shall not favor the party who caused the obscurity. o Co ntracts of adhesion resolved against the party who prepared the contract and in favor of the one who merely adhered to it 6. When it is absolutely impossible to settle doubts by the rules above Art 1378 Par 1 When it is absolutely impossibl e to settle doubts by the rules established in the preceding articles, and the d oubts refer to incidental circumstances of a gratuitous contract, the least tran smission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. a. In gratuitous contracts, incidental circumstances least transmission of rights and interests b. In onerous contracts greatest reciprocity of interests 7. When the doubts are cast upon the principal objects so that the intention cannot be known Art 1378 Par 2 If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. Applicability of Rule 12, R ules of Court (now Secs. 10-19, Rule 130) Art 1379 The principles of interpretat ion stated in Rule 123 of the Rules of Court shall likewise be observed in the c onstruction of contracts. y Law in evidence; interpretation of documents) In bet ween VALID and DEFECTIVE contracts is RELATIVELY INEFFECTIVE ineffectively only with respect to certain parties, but are effective as to other persons. y Agains t voidable contract: ineffectiveness is produced ipso jure y Void or inexistent contract: can be made completely effective by the consent of the person as to wh om it is effective or by the cessation of the impediment which prevents its comp lete ineffectiveness (1) assignment of the lease by the lessee without the conse nt of the lessor is ineffective only as regards the lessor, (2) transfer of a de bt by the debtor to another, without the consent of the creditor is ineffective as to the creditor, (3) the payment by a debtor to his creditor after the credit has been garnished or attached by a third person is ineffective to the latter DEFECTIVE CONTRACTS Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 90 of 110 1. RESCISSIBLE contract that has caused a particular damage to one of the partie s or to a third person and which for EQUITABLE REASONS may be set aside even if valid 2. VOIDABLE OR ANNULLABLE (contrato nulo) contract in which CONSENT of one of the parties is defective, either because of WANT OF CAPACITY or because it i s VITIATED , but which contract is VALID until JUDICIALLY set aside 3. UNENFORCE ABLE contract that for some reason CANNOT BE ENFORCED, UNLESS RATIFIED in the ma nner PROVIDED BY LAW 4. VOID AND NON-EXISTENT (contrato inexistente) contract wh ich is an ABSOLUTE NULLITY and produces NO EFFECT, as if it had never been execu ted or entered into Chapter VI. Rescissible Contracts Kinds of Rescissible Contracts Art 1381 The following are rescissible contracts: 1. Entered into by guardians whenever the wards suffer lesion by more than of va lue of things object y Guardian: authorized only to manage ward s property, no p ower to dispose without prior approval of court. Only includes those which are o rdinary course of management of estate of the ward, because if sale, mortgage an d other encumbrance AND not approved by court, it becomes unenforceable. y Sir L abitag: thin band of contracts 2. Agreed upon in representation of absentee, suf fer lesion by more than of the value of things object y Same principle in relatio n to contracts by guardians 3. In fraud of creditors who cannot collect claims d ue them y Requisites of Accion Pauliana 1. Plaintiff asking for rescission (subs idiary action) has a credit prior to the alienation 2. Debtor has made subsequen t contract, giving advantage to a 3rd person 3. Creditor has no other remedy but to rescind the debtor s contract to the 3rd person (last resort) 4. Act being i mpugned is fraudulent 5. 3rd person who received the property is an accomplice i n the fraud y Credit must be existing at the time of the fraudulent alienation, although not yet due. But at the time of accion pauliana, the credit must alread y be due because it presupposes a judgment and unsatisfied execution which canno t exist when the debt is not yet demandable at the time the rescissory action is brought. y GENERAL RULE: Credit is prior to the alienation y EXCEPTION: Credit is after alienation but entitled to accion pauliana because of some prior right 1. Claims were acknowledged by the debtor after alienation, but origin of which antedated the alienation 2. Those who become subrogated, after the alienation, i n the rights of a creditor whose credits were prior to the alienation y Even sec ured creditors are entitled to AP y Conveyance was intentionally fraudulent whic h may be established by the presumption in Art 1387 y TEST OF FRAUD: Whether the conveyance was a bona fide transaction or a trick and contrivance to defeat cre ditors or whether it conserves to the debtor a special right; founded on good co nsideration or is made with bona fide intent. Does it prejudice the right of cre ditors?? y Good consideration: creditor is not prejudiced becomes the property w as merely replaced or substituted y Badges of fraud applicable 4. Things under l itigation, without knowledge and approval of litigant or of competent judicial a uthority y To secure the possible effectivity of a claim y Transferee of propert y in good faith who acquires property for valuable consideration, without knowle dge of the litigation or claim of the plaintiff, cannot be deprived of property. 5. Specially declared by law to be subject of rescission Characteristics of Res cissible Contracts Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 91 of 110 1. Their defect consist in injury or damage either to one of the contracting par ties or to third persons LESION: injury which one of the parties suffers by virt ue of contract that is disadvantageous to him; must be known or could have been known at the birth of contract and not due to subsequent thereto or unknown to t he parties E.g. Art 1098 Partition, judicial and extra-judicial may be rescinded on account of lesion Art 1539 Sale of real estate of inferior thing Art 1542 Sa le of real estate made for a lump sum 2. They are valid before rescission 3. The y can be attacked directly only, not collaterally 4. They can be attacked only e ither by a contracting party, or by a third person who is injured or defrauded 5 . They can be convalidated only by prescription and not by ratification RESCISSI ON Art 1380 Contracts validly agreed upon may be rescinded in the cases establis hed by law. Definition Remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contr act, even if this should be valid, by means of the restoration of things to thei r condition at the moment prior to the celebration of said contract. Relief for the protection of one of the contracting parties AND third persons from all inju ry and damages the contract may cause OR protect some incompatible and preferent right created by the contract Implies a contract which, even if initially valid , produces a lesion or pecuniary damage to someone Set asides the act or contrac t for justifiable reasons of equity Grounds for rescission can only be for legal cause Voidable contracts may also be rescinded Sir Labitag: Rescissible contrac ts are in between valid and void Rescission Art 1380 Distinguished from Resoluti on Art 1191 Art 1191 Resolution Art 1380 Rescission Presuppose contracts validly entered int o and existing Rescission v. Annulment: the latter there is a defect which vitia tes/invalidates the contract 2. Mutual restitution when declared proper Only by a party to the contract Party to the contract suffering lesion Third parties pre judiced by the contract Non-performance (implied tacit condition in reciprocal V arious reasons of equity provided by the grounds, obligation) mainly economic in jury or lesions Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for extension of time to perform obligation (whether slight rescission (cannot be refused if all the requisites are or casu al breach) satisfied) Only to reciprocal Unilateral, reciprocal Even when contra ct is fully fulfilled Principal Remedy Secondary/Subsidiary 1. Similarities Who may demand Grounds Scope of judicial control Kind of obli applicable to Char acter Case: y Universal Food Corporation v CA MUTUAL DISSENT not the same with resciss ion, because mutual dissent is tantamount to a simple creation of new contract f or the dissolution of the previous one. In order for rescission to take place, t he requisites must first be satisfied: Requisites for Rescission 1. The contract is rescissible Art 1381 Kinds of rescissible contracts Art 1382 Payments made i n a state of insolvency for obligations to whose fulfillment the debtor could no t be compelled at the time (has not yet matured) they were effected, are also re scissible. 2. The party asking for rescission has no other legal means to obtain reparation Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 92 of 110 Art 1383 The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation f or the same. 3. He is able to return whatever he may be obliged to restore if re scission is granted Art 1385 Rescission creates the obligation to return the thi ngs which were the object of the contract, together with their fruits, and the p rice with its interest 4. The object of the contract has not passed legally to t he possession of a third person acting in good faith Art 1385 consequently, it c an be carried out only when he who demands rescission can return whatever he may be obliged to restore. Art 1385 Par 3 Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. 5. The action for rescission is bro ught within the prescriptive period of four years Art 1389 The action to claim r escission must be commenced within four years. For persons under guardianship an d for absentees, the period of four years shall not begin until the termination of the former s incapacity or until the domicile of the latter is known. o Perio d commences on the termination of the ward s incapacity or absentee s domicile i s known Effect of Rescission If in fraud of the creditors: Property alienated re verts to the patrimony of the debtor and becomes liable to creditor who sought r escission, under its original liability as a guaranty of the debtor s obligation Art 1385 Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its inter est; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. With respect to third persons who acquired the thing in good faith y Transferee of property in good faith who acq uires property for valuable consideration, without knowledge of the litigation o r claim of the plaintiff, cannot be deprived of property. y Art 1385 Par 2 Neith er shall rescission take place when the things which are the object of the contr act are legally in the possession of third persons who did not act in bad faith. y Art 1385 Par 3 In this case, indemnity for damages may be demanded from the p erson causing the loss. y Right of transferee to retain alienation: Nature of tr ansfer o ONEROUS Good faith no rescission Bad faith rescissible because of his c omplicity in the fraud not entitled for reimbursement because in pari delicto; i f not possible to return, indemnify the plaintiff; o GRATUITOUS Good faith does not protect him because he gave nothing; rescissible, though not required to res tore the fruits Bad faith rescissible because of his complicity in the fraud; if not possible to return, indemnify the plaintiff Who may bring action for rescis sion 1. Creditor injured 2. Heirs of creditor injured 3. Creditors of creditor i njured (by virtue of accion subrogatoria) Extent of Rescission Art 1384 Rescissi on shall be only to the extent necessary to cover the damages caused. y As to th e excess, alienation is maintained even if transferee is in bad faith y Benefits only the plaintiff creditor, not everyone y BUT if transferee is willing to pay , no rescission Presumptions of Fraud Art 1387 All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been ente red into in fraud of creditors, when the donor did not reserve sufficient proper ty to pay all debts contracted before the donation. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 93 of 110 Alienations by onerous title are also presumed fraudulent when made by persons a gainst whom some judgment has been issued. The decision or attachment need not r efer to the property alienated, and need not have been obtained by the party see king the rescission. In addition to these presumptions, the design to defraud cr editors may be proved in any other manner recognized by the law of evidence. Reb uttal by evidence that conveyance was made: o In good faith o For a sufficient c ause Effect of Fraud: Does not necessarily make the alienation rescissible. It i s only one of the requisites for accion pauliana. Can be overruled by a transfer ee in good faith and for valuable consideration Badges of Fraud (indicia of frau d) rules by which fraudulent character of transaction may be determined 1. Ficti tious/insufficient consideration 2. Conveyance is after suit is filed and while it is pending 3. Sale on credit by insolvent debtor 4. Evidence of insolvency or large indebtedness 5. Transfer of All or nearly all of debtor s property 6. Tra nsfer is between father and son when some of above is present 7. Failure of vend ee to take exclusive possession of the property Cases: y Oria v McMicking y Sigu an v Lim y Suntay v CA supra Liability for acquiring in bad faith the things ali enated in fraud of creditors Art 1388 Whoever acquires in bad faith the things a lienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be i mpossible for him to return them. If there are two or more alienations, the firs t acquirer shall be liable first, and so on successively. Chapter VII. Voidable or Annullable Contracts Kinds of Voidable/Annullable Contracts Art 1390 Although no damage to contractin g parties: 1. Want of capacity 2. Vitiated consent Characteristics of Voidable/A nnullable Contracts 1. Their defect consists in the vitiation of consent of one of the contracting parties 2. They are binding until they are annulled by a comp etent court 3. They are susceptible of convalidation by ratification or by presc ription ANNULMENT Annulment distinguished from Rescission NULLITY (Voidable) Declares inefficiency which contract already carries in itsel f (intrinsic defect) Requires act of ratification to be cured Based on a vice of the contract which invalidates it Annulment is a sanction based on law Demanded only by the parties to the contract Public interest predominates RESCISSION (Re scissible) Merely produces inefficiency, which did not exist essentially in the contract (external defect i.e. pecuniary damages or prejudice to one of the cont racting parties or 3rd persons) Needs no ratification to be effective Compatible with the perfect validity of the contract Rescission is a remedy based on equit y Demanded even by third parties affected by it Private interest predominates Grounds for Annulment Art 1390 1. Incapacity to consent Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 94 of 110 Not a requisite sine qua non of the contract; want is only a ground for annulmen t 2. Vices of consent: violence, intimidation, undue influence, mistake or fraud Who may and may not institute an Action for Annulment Art 1397 A. MAY: All who are obliged principally or subsidiarily Art 1395: action does not require confor mity of the other party who has no right to bring action for annulment Requisite s: a. Interest in the contract there must be legal capacity by being bound to th e contract either principally or subsidiarily b. Victim and not the party respon sible for the defect he who comes to the court must come with clean hands (so no t applicable to the successor in interest of one who has contracted with a minor ) B. MAY NOT: 1. Capable parties cannot allege the incapacity of those with whom they contracted 2. Parties who exerted intimidation, violence or undue influenc e or employed fraud or caused mistake 3. Third person who is a stranger to the c ontract. UNLESS he can prove that the contract prejudiced his rights with respec t to one of the contracting parties, he may ask for annulment e.g. guarantors an d sureties (Singsong v. Isabela Sawmill) Case: y Singsong v Isabela Sawmill Pres cription of Action for Annulment after prescription, contract can no longer be s et aside Art 1391 - Within 4 years Period shall begin: 1. Intimidation, violence or undue influence: from the time consensual defect ceases 2. Mistake or fraud: from the time of discovery of the same 3. Incapacity: from the time guardianshi p ceases * Extinctive prescription applies not only to action for annulment, but also to the defense of nullity * Applies to the parties of to the contract, but NOT to third persons Effects of Annulment cleanses the contract from all its de fect from the moment it was constituted (retroactive effect), but does not preju dice rights of 3rd persons acquire before the ratification Art 1396 a. MUTUAL RE STITUTION Art 1398 Restore to each other things which have been the subject matt er of the contract, together with fruits and the price with interest, EXCEPT in cases provided by law (principle of unjust enrichment): compensation, services r endered in contracts of service ELIMINATES AWARD FOR DAMAGES. But when there is loss or suffered damages, injured party may be entitled to recover indemnity for damages. b. Art 1402 as long as one does not restore what he is bound to return , the other cannot be compelled to return y LOSS THROUGH PLAINTIFF S (party enti tled to bring action) FAULT or FRAUD: Action is extinguished, even if at the tim e of the loss the plaintiff is still a minor or insane (Art 1401) y LOSS THROUGH FORTUITOUS EVENT, BUT PLAINTIFF WILLING TO PAY: Apply Art 1400, defendant shoul d return but not including the interest because loss not due to his fault. y LOS S OF FRUITS AND ACCESSIONS: Apply Art 1400, pay value if cannot return (both pla intiff and defendant) 1. When one of the parties is incapacitated Art 1399 not o bliged to make any restitution EXCEPT insofar as he has been benefited by the pr ice/thing received Benefit not necessarily a material and permanent increase in fortune Proof of benefit incumbent upon the defendant, in the absence of such pr oof, the presumption is there is no benefit/profit to the incapacitated person I f still in the patrimony at the time incapacity ceases, deemed to have been bene fited. If he asks for annulment, he must return it to the other party. If he squ anders, it is ratification. 2. When the thing is lost through the fault of the p arty obliged to return the same (i.e. defendant) Art 1400 return the fruits rece ived AND the value of thing at the time of loss, with interest from same date LO SS THROUGH FORTUITOUS EVENT: pay the value of the thing lost but not fruits and interests Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 95 of 110 Cases: y Cadwallader & Co v Smith, Bell & Co y Velarde v CA supra Extinguishment of the Action a. Art 1392 By ratification Confirmation/ratification: cures a de fect of nullity Acknowledgment: remedies deficiency of proof b. Art 1401 When th e thing is lost through the fault of the person who has the right to file the ac tion LOSS NOT THROUGH THE FAULT, e.g. fortuitous event: not extinguished because extinguishment limited only to the loss by fault of plaintiff. Unjust enrichmen t if the loss is returned for the defendant to bear. Hence, the defendant cannot be obliged to make restitution to the plaintiff because of Art 1402 (cannot com pelled to return if the other party does not return) Cannot extinguish action fo r annulment by any event not imputable to the fault or fraud of the plaintiff RA TIFICATION Requisites of Ratification a. Contract is voidable/annullable (i.e. c onsent of one party is defective) b. Ratification is made with the knowledge of the cause for nullity c. At the time of the ratification, the cause of nullity h as already ceased to exist Forms of Ratification a. Art 1393 Express or tacit: e xecute an act which necessarily implies an intention to waive his rights E.g. of EXPRESS: any oral or written manifestation of the person entitled to ask for an nulment that he agrees to be bound by the contract or that he will not seek its annulment E.g. of IMPLIED: silence or acquiescence acts showing approval or adop tion of the contract acceptance and retention of benefits flowing therefrom b. A rt 1394 By the parties themselves or by the guardian in behalf of an incapacitat ed party - During the existence of incapacity - Right to ratify is transmitted t o the heirs of the party entitled to such right. Effects of Ratification a. Art 1392 Action to annul is extinguished b. Art 1396 The contract is cleansed retroa ctively from all its defects from the time it was constituted EXCEPTION: Right o f 3rd persons prior to ratification Case: y Uy Soo Lim v Tan Unchuan Chapter VIII. Unenforceable Contracts Characteristics of Unenforceable Contracts 1. They cannot be enforced by a prope r action in court 2. They are susceptible of ratification 3. They cannot be assa iled by third persons Art 1408 Unenforceable distinguished from Rescissible and Annullable UNENFORCEABLE Produces NO legal effect unless ratified by competent court RESCIS SIBLE AND ANNULLABLE Produce legal effects unless set aside by competent court Kinds of Unenforceable Contracts 1. Entered into in the name of another person b y one who has no authority or no legal representation OR acted beyond his powers 2. Do not comply with Statute of Frauds, which are agreements unenforceable unl ess in written memorandum and subscribed by the party charged Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 96 of 110 a. Not to be performed within 1 year from the making If no time is fixed and not hing to show that it cannot be performed within a year, then not within SoF; Par tial performance also takes it out of SOF b. Special promise to answer for the d ebt, default or miscarriage of another Default or Miscarriage include liability for tort and are not to be restricted to defaults and miscarriages arising out o f contracts; Must be collateral only and not primarily liable for the debt c. Ag reement made in consideration of marriage other than mutual promise to marry not limited to marrying parties but also to promises by a third person to one of th e parties contemplating the marriage d. Sale of goods, chattels or things in act ion, priced > P500 unless buyer accept and receive part of such goods and chatte ls or the evidences or some of them or pay at the time some part of the purchase money. EXCEPTION: sale is by auction and entry is made by auctioneer in his sal es book (because it constitutes sufficient memorandum) e. Leasing for period lon ger than one year OR sale of real property or of an interest therein f. Represen tation to the credit of a 3rd person 3. Both parties are incapable of giving con sent to contract Art 1403 Par 1: Unauthorized contracts Governing rules in Unaut horized Contracts: Art 1404 Governed by Art 1317 (no one may contract in the nam e of the other without being authorized or unless he has by law a right to repre sent him; representation without authority or legal representation makes the con tract unenforceable) and principles of Agency in Title X of this Book - Does not having binding effect on the principal, UNLESS principal ratifies it which cure s the unauthorized contract. - Agent who binds his principal without authority t o do so is liable to 3rd persons. Art 1403 Par 2: Contracts covered by the Statu te of Frauds Statute of Frauds: descriptive of statutes which requires certain c lasses of contracts to be in writing. Merely regulates the formalities of the co ntract necessary to render it enforceable. y NOT APPLICABLE TO: (1)Action for sp ecific performance, (2) Violation of the contract y APPLICABLE TO: Executory and not to complete or executed contracts intention of the parties become apparent by their execution. However, partial performance must also be proven. y Exclusiv e list of agreements/contracts enumerated; Rule of exclusion y A personal defens e (hence cannot be raised by 3rd persons) and the same may be waived y Does not determine credibility or weight of the evidence, merely concerned with the admis sibility thereof Purpose of Statute: Prevent (and not to encourage it) fraud and perjury in the enforcement of obligations depending for their evidence upon the unassisted memory of witnesses, by requiring certain enumerated contracts and t ransactions to be evidenced by a writing signed by the party to be charged. - Pr ovides for the manner which contracts under it shall be proved - Does not attemp t to make contracts invalid if not executed in writing, only makes ineffective t he action for specific performance - Principal aims: (1) prevent commission of i njustice due to faulty memory, (2) discouraging intentional misrepresentations W RITTEN MEMORANDUM OR NOTE evidence of the agreement and is used to show the inte ntion of the parties Minimum requirement for written memorandum: 1. Names of the parties 2. Terms and conditions of the agreement 3. Description of the subject matter sufficient to render it capable of identification 4. Date and place of th e making of the agreement 5. Signature of the party assuming the obligation Case s: y PNB v Philippine Vegetable Oil Co y Limketkai Sons Milling Inc v CA y Swedi sh Match v CA How to ratify contracts under Statute of Frauds? Art 1405 1. Failu re to object to the presentation of oral/parole evidence to prove the same 2. Ac ceptance of benefits under them SoF cannot be invoked when the contract has been partly executed Case: Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 97 of 110 y Carbonell v Poncio Right of the parties when a contract is ENFORCEABLE BUT a public document is NEC ESSARY for its registration Art 1406 may avail of their rights under Art 1357 (p arties may compel each other to observe the necessary form once the contract has been perfected) Art 1403 Par 3: Contracts executed by parties who are both inca pable of giving consent to a contract Art 1407 a. Effect of ratification by the parent or guardian of one of the parties: (express or implied) o Converts the co ntract into a voidable contract, at the option of the party who has not ratified . o The non-ratifying party may: enforce the contract OR ask for the annulment b . Effect of ratification by the parents or guardians of both parties: validated from the inception Chapter IX. Void or Inexistent Contracts Characteristics of Void/Inexistent Contracts 1. Void from the beginning 2. Produ ces no effect whatsoever nullity exist ipso jure, judgment of nullity is merely declaratory 3. Cannot be confirmed or validated (by prescription OR ratification ), neither can the right to set up the defense of illegality be waived Art 1409 ACCION REIVINDICATORIA any person may invoke the inexistence of the contract whe never juridical effects founded thereon are asserted against him Action to Decla re Nullity - necessary because nobody can take the law into his own hands - if t he void contract is still executory, no party need to bring an action; but if on e party brings action to enforce it, nullity can be set up as defense Void/inexi stent contracts distinguished from other defective contracts VOID Defect is inherent in the contract itself RESCISSIBLE Defect is in their ef fects, either to one of the parties or to a 3rd party Matter of law and public i nterest Based on equity and more a matter of private interest No legal effects e ven if no action is taken to set it aside No action, remains valid and produces all its effects Action to declare nullity of void contracts never prescribes Act ion to rescind prescribes in 4 years VOID UNENFORCEABLE Cannot be the basis of a ctions to enforce compliance Can never be ratified and become enforceable Can be ratified and thereafter enforced There is no contract at all There is a contrac t which, however, cannot be enforced unless properly ratified VOID VOIDABLE One of those essential requisites is wanting, either in fact or in Essential requisi tes for validity is present, BUT consent is law or is declared void by statute v itiated No contract, but only appearance of one, produces no effect Valid until set aside, validity may only be assailed directly, never even if not set aside b y direct action (collateral attack allowed) by a 3rd person Not susceptible of r atification May be rendered perfectly valid by ratification Action to declare nu llity does not prescribe, permanent, even if Action for annulment prescribes in 4 years the cause of nullity ceased to exist Kinds of Void/Inexistent Contracts Art 1409 Contracts that are VOID Art 1409 Par 1 1. Those whose cause, object or purpose is contrary to law, morals, good customs , public order, or public policy Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 98 of 110 a. Art 1411 When the act constitutes a criminal offense (illegality of cause or object) IN PARI DELICTO RULE 1. BOTH are in pari delicto No action against each other BOTH will be prosecuted RPC provision relative to the disposal of effects/ instruments of a crime shall apply 2. ONLY ONE is guilty INNOCENT PARTY may clai m what he has given INNOCENT PARTY not bound to comply with his promise Case: y Urada v Mapalad b. Art 1412 When the act is unlawful but does not criminal offen se IN PARI DELICTO RULE 1. BOTH parties at fault Neither party may recover what he has given by virtue of the contract Neither party may demand the performance of the other s undertaking 2. ONLY ONE is guilty INNOCENT PARTY may demand the r eturn of what he has given without obligation to comply with his promise PARTY A T FAULT cannot recover what he has given by reason of the contract PARTY AT FAUL T cannot ask for the fulfillment of what has been promised to him Not applicable to fictitious contracts because they refer to contracts with an illegal cause o r subject-matter (criminal offense OR only illegal), OR to contracts that are nu ll and void ab initio. Fictitious or simulated contracts don t have cause. Case: y Modina v CA EXCEPTIONS TO THE IN PARI DELICTO RULE General Statement of the E xception (Art 1416): Agreement is not illegal per se, but merely prohibited y Pr ohibition is designed for the protection of the plaintiff y Plaintiff may recove r what he paid or delivered if public policy is enhanced y ILLEGAL PER SE one th at by universally recognized standards is inherently or by its very nature bad, improper, immoral or contrary to good conscience. Cases: y PBC v Lui She y Frenz el v Catito OTHER SPECIFIC EXCEPTIONS c. Art 1414 When the PURPOSE is illegal an d money is paid or property delivered therefore maybe repudiated by one of the p arties before the purpose has been accomplished OR before any damage has been ca used to a 3rd person. Courts may allow the party repudiating the contract to rec over the money or property, if the public interest will thus be subserved. d. Art 1415 When the CONTRACT is illegal and one of the parties is INCAPABLE of giving consent courts may allow recovery of money/property delivered by the inca pacitated person, if interest of justice so demands Case: y Liguez v CA y Relloz a v Gaw Cheen Hun Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 99 of 110 e. Art 1417 When the amount paid exceeds the maximum fixed by law maximum price may recover such excess f. any person paying in excess of the Art 1418 When by virtue of contract a laborer undertakes to work longer than the maximum number of hours of work fixed by law worked may demand additional compe nsation for service rendered beyond the limit entitled to recover deficiency g. Art 1419 When a laborer agrees to accept a lower wage than that set by law h. Art 1420 When the contract is divisible if illegal terms can be separated fro m legal ones, enforce latter y In case of doubt, contract is considered as divis ible or separable. y EXCEPTIONS: 1. Nature of contract requires indivisibility e .g. contract of compromise 2. Intention of the parties is that the contract be e ntire e.g. if what is void be the essential part, void the entire contract. Divi sibility will only be followed when the nullity affects only the secondary or ac cessory obligations. i. Art 1422 When the contract is the DIRECT RESULT of a pre vious illegal contract 2. Those whose object is outside the commerce of man 3. T hose which contemplate an impossible service 4. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained 5. Those expressly prohibited are declared void by law also void and inexistent Art 1409 Par 4 Art 1409 Par 5 Art 1409 Par 6 Art 1409 Par 7 Contracts that are INEXISTENT Art 1409 Par 2 1. Those which are absolutely simulated or fictitious Art 1345 Simulation of con tracts may be ABSOLUTE (parties do not intend to be bound at all) or RELATIVE (p arties conceal their true agreement) Art 1346 Absolute or Fictitious: void 2. Th ose whose cause or object did not exist at the time of the transaction Art 1409 Par 3 Right to set up defense of illegality cannot be waived Art 1409 The action or de fense for the declaration of the inexistence of a contract 1. Art 1410 Does not prescribe, defect is permanent and incurable 2. Art 1421 Is NOT available to 3rd persons whose interest is not directly affected * Ratification may take the for m of a new contract, in which case its validity shall be determined only by the circumstances at the time of the execution of the new contract. However, the sam e does not retroact to the constitution of the first contract. See Table of Defe ctive Contracts in the next page. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 100 of 110 DEFECTIVE CONTRACTS Professor E. A. Labitag DEFECTIVE CONTRACTS AS TO NATURE OF DEFECT Contracts of guardians (acts of administration) when wards they represent suffer lesion of more than 25% of the value of thing Contracts in representation of ab sentees when latter suffers lesion of more than 25% of value of thing Contracts entered into by debtor who is a state of insolvency, i.e. contracts entered into in fraud of creditors (Accion Pauliana) EFFECT ON CONTRACT ASSAILABLE? HOW? YES but only through DIRECT action for rescission No rescission if: a. plaintiff has other legal means to obtain reparation (subsidiary) b. plaintiff cannot ret urn what must be restored c. object in the hands of 3rd persons in good faith d. Contract approved by court (Art 1386) WHO CAN ASSAIL? By ward Or by guardian ad litem of ward during incapacity of ward in action agai nst original guardian WHEN TO ASSAIL? CURABLE? HOW? WHO C RESCISSIBLE (Arts 1381 1389) Economic prejudice or damage to: - owner - 3rd person - litigan t Can generally be ASSAILED and CURED by: Injured Party EFFECTS: Mutual restitut ion VALID until rescinded Within 4 years from gaining (minor) or regaining (insane) capacity YES By ratification (Confirmation by the ward) By ward VALID until rescinded By absentee Within 4 years from knowledge of domicile of absentee YES By prescription By absen VALID until rescinded Contracts which refer to things in litigation without the knowledge and approval of litigants or competent judicial authority All other contracts declared by la w to be subject of rescission E.g. Art 1098 Partition

VALID until rescinded YES but only through DIRECT action for rescission No rescission if: a. plaintiff has other legal means to obtain reparation (subsidiary) b. plaintiff cannot ret urn what must be restored c. object in the hands of 3rd persons in good faith By plaintiff-creditor By heirs of creditor BY creditors of creditors injured (ac cion subrogatoria) By other third parties prejudiced by the contract Within 4 years from knowledge of fraudulent contract YES By prescription By credito By party litigant Within 4 years from knowledge of fraudulent contract YES By prescription By party VALID until rescinded

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 101 of 110 DEFECTIVE CONTRACTS AS TO NATURE OF DEFECT Want of capacity - age - insanity EFFECT ON CONTRACT ASSAILABLE? HOW? WHO CAN ASSAIL? All who are obliged principally or subsidiarily (i.e. guarantors and sureties) I ncapacitated party; not the party with capacity Victim; not the party who cause the defect WHEN TO ASSAIL? Within 4 years from cessation of (re)gaining capacity CURABLE? HOW? YES By ratification By prescription YES 1 By ratification - Express - Implied (silence or acquiescence, acts showing approval or adoption of contract, accepta nce and retention of benefits) WHO C VOIDABLE (Arts 1390 1402) Vitiated consent EFFECT: Cleanses defect of contract Does not p rejudice right of 3P prior to ratification Mutual restitution Consent is vitiated by: - mistake or error - violence and intimidation (duress) - undue influence - frau d, misrepresentation VALID until annulled by court action YES. Both through direct and collateral attacks. Action for annulment By parties Within 4 years from: - cessation of intimidation, violence, undue influence (con sensual defect) - discovery of mistake or fraud By guardi of an inca party dur of incapa 2 By prescription UNENFORCEABLE (Arts 1403 1408) Contract entered into name of another without authority or in excess of authorit y VALID but cannot be ENFORCED by a proper action in court YES. Not by direct action but by DEFENSE of unenforceability of contract through motion to dismiss complaint on the ground that contract is unenforceable YES. N ot by direct action but by DEFENSE of unenforceability of contract either throug h: 1. motion to dismiss complaint on the ground that contract is unenforceable 2 . objection to presentation of oral evidence to prove contract

By owner of property At any time one party attempts to enforce contract against the other through a c ourt action By ratification Person in the contr entered in By acknowledgement By performance of oral contract By other party By his privies (heirs, representatives and assigns) At any time one party attempts to enforce contract against the other through a court action By failure to object seasonabl y to presentation of oral evidence By acceptance of benefits under the contract Contracts covered by Statute of Frauds and not complying with requirement of a w ritten memo VALID but cannot be ENFORCED by a proper action in court By party the contr enforced

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] YES. Not by direct action but by DEFENSE of unenforceability of contract through motion t o dismiss complaint on the ground that contract is unenforceable By other party Page 102 of 110 Both parties are legally incapacitated to act VALID but cannot be ENFORCED by a proper action in court By his privies (heirs, representatives and assigns) By guardian At any time one party attempts to enforce contract against the other through a c ourt action By parent guardians parties By confirmation Both part (re)gainin act VOID or INEXISTENT (Arts 1409 1422) By innocent party Cause, object or purpose of contract contrary to law, good cus toms, morals, public order or public policy (Art 1401, Par 1) DOES NOT CREATE RI GHTS AND CANNOT IMPOSE OBLIGATION YES. By an action for declaration for nullity By defense of nullity By 3rd persons whose interest are directly affected (If in pari delicto, neither has an action against each other) Imprescriptible Cannot be cured One or some of essential requisites of valid contract lacking in fact or in law a. Absolutely simulated b. Those whose cause or object did not exist c. Object o utside the commerce of man d. Contemplate an impossible service e. Where intenti on of parties re: principal object of contract cannot be ascertained (Art 1402 P ars 2 to 6) DOES NOT CREATE RIGHTS AND CANNOT IMPOSE OBLIGATION YES. By an action for declaration for nullity By defense of nullity By any of the contracting parties By 3rd persons whose interests are directly af fected Imprescriptible Cannot be cured Contracts expressly prohibited by law (Art 1409 Par 7) DOES NOT CREATE RIGHTS AND CANNOT IMPOSE OBLIGATION YES. By an action for declaration for nullity By defense of nullity By party whose protection the prohibition of the law is designed By 3rd party wh ose interests are directly affected Imprescriptible Cannot be cured

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 103 of 110 Title III. NATURAL OBLIGATIONS Four types of obligations in juridical science reduced to two by jurisprudence 1 . Moral obligations duties of conscience completely outside the field of law 2. Natural obligations duties not sanctioned by any action but have a relative judi cial effect 3. Civil obligations juridical obligations that are in conformity wi th positive law but are contrary to juridical principles and susceptible of bein g annulled; enforceable by action 4. Mixed obligations full juridical effect; fa lls under civil obligations Definition Art 1423 Not being based on positive law but on equity and natural law, do not grant a right of action to enforce their p erformance, but after voluntary fulfillment by the obligor, they authorize the r etention of what has been delivered or rendered by reason thereof. y Midway betw een civil and the purely moral obligation. Obligation without a sanction, suscep tible of voluntary performance, but not through compulsion by legal means. y Rea l obligation which law denies action, but which the debtor may perform voluntari ly. y Patrimonial and presupposes a prestation. Requisites of Natural Obligation 1. Juridical tie between two persons. 2. Tie is not given effect by law but ins tead by the conscience of man As distinguished from Civil Obligations NATURAL Not by court actions, but by good conscience of debtor Equity and natura l justice CIVIL Court action or the coercive power of public authority Positive law distinguishes it from civil obligations. As to enforceability As to basis As distinguished from Moral Obligations NATURAL There is a juridical tie Performance by the debtor is a legal fulfillmen t of the obligation A true obligation with a legal tie between debtor and credit or PURELY MORAL There is no juridical tie Act is purely liberality Matter is ent irely within the domain of morals Cases: y Villaroel Estrada y Fisher v Robb Conversion to Civil Obligation GENERA L RULE: Partial payment of a natural obligation does not make it civil; the part paid cannot be recovered but the payment of the balance cannot be enforced. app licable only to natural obligation because of prescription or lack of formalitie s (nullity due to form e.g. Art 1430) and NOT to natural obligation subject to r atification or confirmation. y Payment by mistake is not voluntary and may be re covered. Payment is voluntary when the debtor knew that the obligation is a natu ral one. One who pays a natural obligation, believing it to be civil, does not t hereby recognize the natural obligation; and there being no civil obligation eit her, he can recover what he has paid. The debtor however has the burden of provi ng the mistake. 1. By novation 2. By confirmation or ratification Examples Art 1424 When the right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] performs the contract cannot recover what he has delivered or the value of the service he has rendered. Art 1425 Page 104 of 110 When without the knowledge OR against the will of the debtor, a 3rd person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third peson the obligor cannot recover what he has paid. When a minor 18-21 entered into a contr act without the consent of the parent or guardian, after the annulment of the co ntract, voluntarily returns the whole thing or price received, notwithstanding t hat he has not been benefited thereby, there is no right to demand the thing or price thus returned. When a minor 18-21 entered into a contract without the cons ent of the parent or guardian, voluntarily pays a sum of money or delivers a fun gible thing in fulfillment of an obligation, there shall be no right to recover the same from the oblige who has spent or consumed it in good faith. Not the vol untary payment that prevents recovery, but the consumption or spending of the th ing or money in good faith. This article creates an exception to the rule of mut ual restitution. Minor would have been required to return whatever he received u pon annulment of contract. Good faith: belief that debtor has capacity to delive r the object of contract Fungible thing: consumable Non-consummable: debtor cann ot recover if no longer in the possession of the creditor, because the right to recover presupposes existence of thing. When after an action to enforce a civil obligation has failed, the defendant voluntarily performs the obligation, he can not demand the return of what he has delivered or the payment of the value of th e service he has rendered. When a testate or intestate heir voluntarily pays a d ebt of a decedent exceeding the value of the property which he received by will or by the law of testacy from the estate of the deceased, the payment is valid a nd cannot be rescinded by the payer. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one o f the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effect ive and irrevocable. Art 1426 Art 1427 Art 1428 Art 1429 Art 1430 Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 105 of 110 Title IV. ESTOPPEL Definition Art 1431 Admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relyin g thereon. - Bar which precludes a person from denying or asserting anything to the contrary of that which in has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative officers or by his own deed or representation, either express or implied. - Concludes the truth in orde r to prevent falsehood and fraud, and imposes silence on the party only when in conscience and honesty he should not be allowed to speak. - Origin is in equity and is therefore based on moral right and natural justice - Cannot be predicated on an illegal act EQUITABLE ESTOPPEL May arise even when there is no intention on the part of the person estopped to relinquish any existing right Frequently carries implication of fraud Involves the conduct of both parties WAIVER Voluntary and intentional a bandonment or relinquishment of a known right No implication of fraud Involves t he act or conduct of only one of the parties RATIFICATION Bound because he inten ded to be ESTOPPEL Bound notwithstanding the fact that there was no such intention, becaus e the other party will be prejudiced and defrauded by his conduct unless the law treats him as legally bound Case: y Kalalo v Luz Kinds of Estoppel Art 1433: Estoppel may be in pais or by d eed A. TECHNICAL ESTOPPEL 1. By record preclusion to deny the truth of matters set f orth in a record, whether judicial or legislative, and also to deny the facts ad judicated by a court of competent jurisdiction i. E.g. conclusiveness of judgmen t (estoppel by judgment) on the parties to a case, which according to Sir is bro ader than res judicata 2. By deed bar which precludes on party to a deed and his privies from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying the truth of any material facts asserted in it usually written documents B. EQUITABLE ESTOPPEL (estoppel in pai s) because of something which he has done or omitted to do, a party is denied th e right to plead or prove an otherwise important act y Essential elements of est oppel in pais in relation to the party sought to be estopped: 1. Conduct amounti ng to false representation or concealment of material facts, or at least calcula ted to convey the impression that the facts are otherwise than and inconsistent with, those which the party subsequently attempts to assert 2. Intent, or at lea st expectation that this conduct shall be acted upon by or at least influence, t he other party 3. Knowledge, actual or constructive, of the real facts y Essenti al elements of estoppel in pais in relation to the party claiming the estoppel: 1. Lack of knowledge or of the means of knowledge of the truth as to the facts i n question 2. Reliance, in good faith, upon the conduct or statements of the par ty to be estopped 3. Action or inaction based thereon of such character as to ch ange the position or status of the party claiming the estoppel, to his injury, d etriment or prejudice POSITIVE ESTOPPEL IN PAIS Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 106 of 110 1. Estoppel by representation or misrepresentation (Art 1437 or estoppel against owners) When a contract between 3rd persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over r eal estate, the latter is precluded from asserting his legal title or interest t herein, provided all these requisites are present: 1. Fraudulent representation or wrongful concealment of facts known to the party estopped 2. Party precluded must intent that the other should act upon the facts as misrepresented 3. Party misled must have been unaware of the true facts 4. Party defrauded must have act ed in accordance with the misrepresentation 2. Estoppel by acceptance of benefit s (Art 1438 or estoppel from benefits) One who has allowed another to assume app arent ownership of personal property for the purpose of making any transfer of i t, cannot, if he received the sum for which a pledge has been constituted, set u p his own title to defeat the pledge of the property, made by the other to a ple dge who received the same in good faith and for value. 3. Promissory estoppel An estoppel may arise from making of a promise, even though without consideration, if it was intended that the promise should be relied upon and in fact it was re lied upon, and if a refusal to enforce it would be virtually to sanction the per petuation of fraud or would result in other injustice. b. A promise cannot be th e basis of an estoppel if any other essential element is lacking. c. Justifiable reliance or irreparable detriment to the promise are requisite factors. d. Came from Anglo-American Law, by virtue of Art 1432 which adopts principle of estopp el NEGATIVE ESTOPPEL IN PAIS 1. Estoppel by laches failure or neglect, for an un reasonable and unexplained length of time, to do that which, by exercising due d iligence, could or should have been done earlier. y Public policy requires for t he peace of society, discouragement of stale claims and laches, unlike statute o f limitations, is not a mere question of time but principally a question of ineq uity or unfairness of permitting a right or claim to be enforced or asserted. y Discretionary on the part of the court. y Requisites of laches: a. Conduct on pa rt of the defendant, or one under whom he claims, giving rise to the situation c omplained of b. Delay in asserting complainant s right after he had knowledge of the defendant s conduct and after he has had an opportunity to sue c. Lack of k nowledge or notice on the part of the defendant that the complainant would asser t the right on which he bases his suit d. Injury or prejudice to the defendant i n the event relief is accorded to the complainant y Distinguished from prescript ion LACHES Concerned with effect of delay Principally question of inequity of permit ting a claim Not based on statute but on equity Not based on fixed time PRESCRIP TION Concerned with fact of delay Matter of time Statutory Fixed time 2. Estoppel by silence - One who is silent when he ought to speak will not be he ard to speak when he ought to be silent. Mere innocent silence will not work an estoppel, there must also be some element of turpitude or negligence connected w it the silence by which another is misled to his injury. Closely connected to ES TOPPEL BY ACQUIESCENCE: a person is prevented from maintaining a position incons istent with one in which he has acquiesced. Persons bound Art 1439 Effective onl y as between the parties thereto or their successors in interest (privies in blo od like heirs, and in estate like grantees). y Why? Mutuality is an essential el ement of an estoppel, an estoppel must bind both parties or neither is bound. y No estoppel against government. It is not estopped by mistake or error on the pa rt of its officials or agents, the erroneous application and enforcement of the law by public officers does not prevent a subsequent correct application of the statute. Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 107 of 110 Case: y Manila Lodge No. 761 Benevolent and Protective Order of the Elks v CA Ca ses where estoppels applies Art 1434 Subsequent acquisition of title Art 1435 When a person who is not the o wner of a thing sells or alienates and delivers it, and later the seller or gran tor acquires title thereto, such title passes by operation of law to the buyer o r grantee. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee. A less ee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. When a contract between 3rd persons concerning immovable property, one of them is misled by a person with respect to the owner ship or real right over real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: 1. F raudulent representation or wrongful concealment of facts known to the party est opped 2. Party precluded must intent that the other should act upon the facts as misrepresented 3. Party misled must have been unaware of the true facts 4. Part y defrauded must have acted in accordance with the misrepresentation One who has allowed another to assume apparent ownership of personal property for the purpo se of making any transfer of it, cannot, if he received the sum for which a pled ge has been constituted, set up his own title to defeat the pledge of the proper ty, made by the other to a pledge who received the same in good faith and for va lue. Art 1436 Tenant Art 1437 Estoppel against owner Art 1438 Estoppel from benefits Case: y Miguel v Catalino y Read the annotation on 32 SCRA 542 Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 108 of 110 Title V. TRUSTS Definition Trust is the legal relationship between one person having an EQUITABL E OWNERSHIP in property and another person OWNING THE LEGAL TITLE to such proper ty, the equitable ownership of the former entitling him to the performance of ce rtain duties and the exercise of certain powers by the latter. Characteristic of Trust 1. It is a relationship 2. A relationship of fiduciary character 3. A rel ationship with respect to property, not one involving merely personal duties 4. It involves the existence of equitahble duties imposed upon the holder of the ti tle to the property to deal with it for the benefit of another 5. It arises as a result of a manifestation of intention to create the relationship Governing rul es in Trust Art 1442 Principles of the general law of trusts are transplanted to the Philippine soil Parties in a Trust Art 1440 A person who establishes a trus t is called the trustor; one in whom confidence is reposed as regards property f or the benefit of another person is known as the trustee; and the person for who se benefit the trust has been created is referred to as the beneficiary. TRUSTOR Establishes a trust TRUSTEE One in whom confidence is reposed as regards proper ty for the benefit of another person BENEFICIARY or cestui que trust Person for whose benefit the trust has been created y Liability of trustee who violates tru st is personal. The action (nature of a general demand for damages) can be maint ained by cestui que trust or persons claiming under him or by creator of the tru st only against the trustee. Cestui que trust: Not always necessary that should be named, or even be in existence at the time the trust is created in his favor. y Kinds of Trust Art 1441 Trusts are either express or implied. EXPRESS trusts are created by the intention of the trustor or of the parties. IMPLIED trusts come into being by operation of law. Case: y Salao v Salao 1. EXPRESS TRUSTS can come into existence ONLY by the manifestation of an intention (manifested by conduct or by words) to create it by the one having legal and equitable dominion over t he property made subject to it. y Disables the trustee from acquiring for his ow n benefit the property committed to his management or custody, at least while he does not openly repudiate the trust and make such repudiation known to the bene ficiary. Proof required for Express Trust Art 1443 No express trust concerning a n immovable or any interest therein may be proved by parol evidence. Writing nec essary to prove it; not for the validity but for the purposes of proof it is in the nature of a Statute of Fraud EXCEPTION: If property subject to trust is not real estate or an interest therein, it may be proved by any competent evidence i ncluding parol evidence Requisites of Express Trust 1. Competent trustor 2. Comp etent trustee 3. Ascertainable trust res 4. Sufficiently certain beneficiaries Karichi E. Santos | UP Law B2012

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 109 of 110 Form of an Express Trust Art 1444 No particular words are required for the creat ion of an express trust, it being sufficient that a trust is clearly intended. W ant of Trustee Art 1445 No trust shall fail because the trustee appointed declin es the designation, UNLESS the contrary should appear in the instrument constitu ting the trust. Where a trustee dies, resigns, suffers any legal incapacity, the trust does not fail but a new trustee will be appointed, which will be made by the proper court UNLESS by the terms of the trust, other provision is made for t he appointment of successor trustee. Why? To permit it to fail for this reason w ould be contrary to the intention of the trustor in creating a trust who is prim arily interested in the disposition of the beneficial interest in the property, and the matter of its administration is a subsidiary consideration. Acceptance b y beneficiary Art 1446 Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be PRESUMED, if there is no proof to the contrary. 2. IMPLIED TRUSTS come into existence either through implication of an intention to create a trust as a matter of law or through the imposition of the trust irrespective of and even c ontrary to any, such intention. How to establish Implied Trusts Art 1441 Trusts are either express or implied. Express trusts are created by the intention of th e trustor or of the parties. Implied trusts come into being by operation of law. a. RESULTING arises where a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend th at the person taking or holding the property should have beneficial interest in the property Sir Labitag: effect of failure to create an express trust, did not comply with the proper formality b. CONSTRUCTIVE imposed where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. Th e duty to convey the property arises because it was acquired through fraud, dure ss, undue influence, or mistake or through breach of fiduciary duty or through t he wrongful disposition of another s party. Sir Labitag: The trustee never inten ded to be a trustee, perhaps he intended to be the owner. The law imposed on him the obligation of the trustee because the real owner will be prejudiced (or wil l suffer irreparable damage) if no implied trust is created by law How to prove implied trust Art 1457 An implied trust may be proved by oral evidence. Examples of implied trust Art 1448 Trust from payment Resulting There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by ano ther for the purpose of having the beneficial interest of the property. The form er is a trustee, while the latter is the beneficiary. However if the person to w hom the title is conveyed is a child, legitimate or illegitimate, of the one pay ing the price of the sale, no trust is implied by law, it being disputably presu med that there is a gift in favor of the child. EXCEPTIONS: 1. Last part of the article (in loco parentis) 2. Actual contrary intention is proved e.g. fraudulen t transfers There is also an implied trust when a donation is made to a person b ut it appears that although the legal estate is transmitted to the done, he neve rtheless is either to have no beneficial interest or only a part thereof. E.g. S omebody else is the true beneficiary like an infant son If the price of a sale o f property is loaned or paid by one person for the benefit of another and the co nveyance is made to lender or payor to secure the payment of the debt, a trust a rises by operation of law in favor of the person Karichi E. Santos | UP Law B201 2 Art 1449 Resulting Art 1450 Resulting

OBLIGATIONS & CONTRACTS | Prof. Labitag [2nd Semester, A.Y. 2008-2009] Page 110 of 110 Art 1451 to who the money is loaned or for whom it is paid. The latter may redeem the pro perty and compel a conveyance thereof to him. E.g. Nakpil vs. Valdez in LegProf When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for th e benefit of the true owner. If two or more persons agree to purchase property a nd by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in pr oportion to the interest of each. When property is conveyed to a person in relia nce upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is cont emplated. If an absolute conveyance of property is made in order to secure the p erformance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the g rantor when it becomes due, he may demand reconveyance of the property to him. W hen any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made fo r him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of a n implied trust for the benefit of the person from whom the property comes. Art 1452 Title in one co-owner Resulting Art 1453 Resulting Art 1454 Art 1455 Constructive in favor of the owner Art 1456 Cases: y Fabian v Fabian y Bueno v Reyes y Tamayo v Callejo Karichi E. Santos | UP Law B2012